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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-22725
CRESCENT OPERATING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2701931
- ---------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
306 West 7th Street, Suite 1025
Fort Worth, Texas 76102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 339-1020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Preferred Share Purchase Rights
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the 9,916,934 shares of $.01 par value Common
Stock held by non-affiliates of the registrant on March 10, 1998 was
$242,369,867 based upon the closing price of $24.44 on the NASDAQ Stock Market.
Number of shares of Common Stock outstanding as of March 27, 1998: 11,223,219
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities Exchange
Commission for registrant's 1997 Annual Meeting of Shareholders to be held in
June 1998 are incorporated by reference into Part III of this Form 10-K.
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<TABLE>
<CAPTION>
Page
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TABLE OF CONTENTS
PART I.
<S> <C> <C>
Item 1. Business ......................................................................... 3
Item 2. Properties ....................................................................... 22
Item 3. Legal Proceedings ................................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders .............................. 22
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............ 23
Item 6. Selected Financial Data .......................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................ 24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....................... 28
Item 8 Financial Statements and Supplementary Data ...................................... 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ........................................... 29
PART III.
Item 10. Directors and Executive Officers of the Registrant ............................... 29
Item 11. Executive Compensation ........................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management ................... 30
Item 13. Certain Relationships and Related Transactions ................................... 30
PART IV.
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K ................ 30
</TABLE>
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This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993 and Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include the following: real estate investment considerations, such as
the effect of economic, demographic, competitive and other conditions in the
market area on cash flows and values, and the relatively high levels of debt
maintained by the Company and its ability to generate revenues sufficient to
meet debt service payments and other operating expenses; financing risks, such
as the continued availability of equity and debt financing that may be necessary
or desirable for expansion or continued operations of the Company and its
investments, the Company's ability to service existing debt, the possibility
that the Company's outstanding debt may be refinanced at higher interest rates
or otherwise on terms less favorable to the Company; and business and investment
risks, including the underperformance or non-performance of its existing
businesses and investments, the inability of the Company to identify or pursue
suitable business or investment opportunities, the impact of changes in the
industries in which the Company's businesses and investments operate and
competitive conditions affecting such industries, including construction
equipment sales and leasing, hospitality, behavioral healthcare, land
development and refrigerated warehousing.
PART I
ITEM 1. BUSINESS
THE COMPANY
Crescent Operating, Inc. ("Crescent Operating" or the "Company"), a
Delaware corporation, was formed on April 1, 1997, by Crescent Real Estate
Equities Company ("Crescent Equities") and its subsidiary Crescent Real Estate
Equities Limited Partnership ("Crescent Partnership"). The Company was formed to
be the lessee and operator of certain assets to be acquired by Crescent
Partnership and perform an agreement ("Intercompany Agreement") between Crescent
Operating and Crescent Partnership, pursuant to which each has agreed to provide
the other with rights to participate in certain transactions. On June 12, 1997,
Crescent Operating's registration statement was declared effective and Crescent
Operating became a public company. Effective June 12, 1997, Crescent Equities
distributed shares of Crescent Operating common stock to shareholders of
Crescent Equities and unit holders of Crescent Partnership of record on May 30,
1997. For Crescent Equities shareholders, the distribution was made on the basis
of one share of Crescent Operating common stock for every 10 common shares of
beneficial interest of Crescent Equities held on the record date, and for
limited partners of Crescent Partnership, the distribution was made on the basis
of one share of Crescent Operating common stock for every 5 units of limited
partnership interest held on the record date.
The Company's operations began on May 9, 1997 with the purchase from
Carter-Crowley Properties, Inc. ("Carter-Crowley") of 100% of the common stock
of Moody-Day, Inc. ("Moody-Day"), an equipment sales, leasing and servicing
company, and a limited partner interest in Hicks Muse Tate & Furst Equity Fund
II, LP, a private venture capital fund ("Hicks-Muse", and together with
Moody-Day, the "Carter-Crowley Asset Group"). The Company also acquired for
approximately $12.4 million, a 12.38% limited partner interest in Dallas
Basketball Limited (the "DBL Interest"), the partnership that owns the Dallas
Mavericks. As of June 11, 1997, the Company sold the DBL Interest, for
approximately $12.55 million, to a corporation wholly owned by Crescent
Partnership. This Annual Report on Form 10-K was prepared on the basis that the
Carter-Crowley Asset Group is the "Predecessor". As Crescent Operating did not
have any activity prior to May 9, 1997, the data included relating to 1995,
1996, and January 1, 1997 through May 8, 1997 is only with regard to the
Predecessor.
Crescent Operating common stock was accepted for quotation on the OTC
Bulletin Board and began trading on a when-issued basis on June 13, 1997. On
September 8, 1997, the Company's common stock began trading on the NASDAQ
National Market under the symbol "COPI".
As of December 31, 1997, Crescent Operating's assets were comprised of five
business segments: (i) Hospitality, (ii) Land Development, (iii) Equipment Sales
and Leasing, (iv) Healthcare and (v) Refrigerated Warehousing. Within these
segments, the Company, through various entities, owned the following
(collectively referred to as the "Assets"):
o THE HOSPITALITY SEGMENT consisted of lease arrangements covering the Denver
Marriott City Center, the Hyatt Regency Beaver Creek, the Hyatt Regency
Albuquerque, Canyon Ranch-Tucson, Canyon Ranch-Lenox, the Ventana Country
Inn, the Sonoma Mission Inn and Spa, the Four Seasons Hotel in Houston,
Texas and a two-thirds interest in the Houston Center Athletic Club Venture.
o THE LAND DEVELOPMENT SEGMENT consisted of (i) a 5% economic interest in
Desert Mountain Development Corporation, the general partner of a
partnership that owns a master planned, luxury residential and recreational
community in northern Scottsdale, Arizona, (ii) a 42.5% general partner
interest in The Woodlands Operating Company, L.P., which provides
management, advisory, landscaping and maintenance services to The Woodlands,
Texas and (iii) a 2.125% economic interest in The Woodlands Land Development
Company L.P., which owns approximately 9,000 acres for commercial and
residential development as well as a realty office, an athletic center, and
interests in both a title company and a mortgage company.
o THE EQUIPMENT SALES AND LEASING SEGMENT consisted of 100% of the common
stock of Moody-Day, a construction equipment sales, leasing and service
company.
o THE HEALTHCARE SEGMENT consisted of a 50% member interest in Charter
Behavioral Health Systems, LLC, a limited liability company which operates
approximately 90 behavioral healthcare facilities (see "Recent
Developments").
o THE REFRIGERATED WAREHOUSING SEGMENT consisted of an indirect 2% interest in
both URS Logistics, Inc., a company that operates and manages public
refrigerated warehouses in the continental United States and Americold
Corporation, a company providing integrated logistics services for the
frozen food industry, consisting of warehousing and transportation.
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SEGMENT FINANCIAL INFORMATION
The following is a summary of Crescent Operating's financial information
reported by segment as of December 31, 1997 and for the period from May 9, 1997
through December 31, 1997:
<TABLE>
<CAPTION>
Equipment
Land Sales
Hospitality Development and Leasing Healthcare
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<S> <C> <C> <C> <C>
Revenues ......................... $ 79,467,764 $66,896,540 $ 10,517,817 $ --
Operating expenses ............... 79,236,262 67,095,042 9,782,834 --
------------- ----------- ------------- ------------
Income (loss) from operations .... 231,502 (198,502) 734,983 --
------------- ----------- ------------- ------------
Investment income (loss) ......... 9,239 2,553,400 -- (19,610,000)
------------- ----------- ------------- ------------
Other (income) expense
Interest expense ............ 162,786 2,368,180 166,108 --
Interest income ............. (150,646) (1,347,577) (11,404) --
Other ....................... -- -- (48,254) --
------------- ----------- ------------- ------------
Total other (income) expense ..... 12,140 1,020,603 106,450 --
------------- ----------- ------------- ------------
Income (loss) before minority
interest and income taxes ... 228,601 1,334,295 628,533 (19,610,000)
Minority interest ................ -- (531,877) -- --
------------- ----------- ------------- ------------
Income (loss) before taxes ....... 228,601 802,418 628,533 (19,610,000)
Income tax (provision) benefit ... -- (612,641) -- --
------------- ----------- ------------- ------------
Net income (loss) ................ $ 228,601 $ 189,777 $ 628,533 $(19,610,000)
============= =========== ============= ============
Net income (loss) per share,
basic and diluted ........... $ 0.02 $ 0.02 $ 0.06 $ (1.77)
============= =========== ============= ============
Total assets ..................... $ 39,145,825 $328,278,985 (a) $ 27,843,022 $ 5,390,000
============= =========== ============= ============
<CAPTION>
Refrigerated
Warehousing Other Total
------------- ----------- -------------
<S> <C> <C> <C>
Revenues ......................... $ -- $ -- $ 156,882,121
Operating expenses ............... -- 1,760,609 157,874,747
------------- ----------- -------------
Income (loss) from operations .... -- (1,760,609) (992,626)
------------- ----------- -------------
Investment income (loss) ......... 36,000 588,683 (16,422,678)
------------- ----------- -------------
Other (income) expense
Interest expense ............ -- 2,783,669 5,480,743
Interest income ............. -- (241,414) (1,751,041)
Other ....................... -- (110,252) (158,506)
------------- ----------- -------------
Total other (income) expense ..... -- 2,432,003 3,571,196
------------- ----------- -------------
Income (loss) before minority
interest and income taxes ... 36,000 (3,603,929) (20,986,500)
Minority interest ................ (34,200) -- (566,077)
------------- ----------- -------------
Income (loss) before taxes ....... 1,800 (3,603,929) (21,552,577)
Income tax (provision) benefit ... -- -- (612,641)
------------- ----------- -------------
Net income (loss) ................ $ 1,800 $(3,603,929) $ (22,165,218)
============= =========== =============
Net income (loss) per share,
basic and diluted ........... $ -- $ (0.33) $ (2.00)
============= =========== =============
Total assets ..................... $ 161,850,800 (b) $23,468,444 $ 585,977,076
============= =========== =============
</TABLE>
(a) Amount represents assets before consideration of minority interest of
$101,887,893.
(b) Amount represents assets before consideration of minority interest o
$151,678,729.
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RECENT DEVELOPMENTS
CBHS TRANSACTION
Effective March 3, 1998, Crescent Operating signed a definitive
agreement (the "Equity Purchase Agreement") to acquire from Charter Behavioral
Health Systems, Inc. ("Charter Inc.") its 50% membership interest (the
"Interest") in Charter Behavioral Health Systems, LLC ("CBHS"), the nation's
largest provider of inpatient behavioral health care. Under the Equity Purchase
Agreement, Crescent Operating has agreed to issue to Charter Inc., a subsidiary
of Magellan Health Services, Inc. ("Magellan"), $30 million in registered
Crescent Operating common stock in consideration of the sale of the Interest.
Effective March 3, 1998, CBHS signed a definitive agreement (the
"Purchase Agreement") to acquire from Magellan and certain direct and indirect
subsidiaries of Magellan (collectively, the "Sellers"), for a purchase price of
$280 million, equity interests in certain entities and the assets of certain
staff model clinics. Under the terms of the Purchase Agreement, approximately
$78 million of annual franchise fees currently paid by CBHS to Magellan or its
subsidiaries, would be eliminated.
CBHS and Magellan also expect to enter into a provider services
agreement (the "Provider Services Agreement"), pursuant to which, for a period
of 10 years, CBHS would be designated a preferred provider of behavioral health
care services to members ("Members") under benefit agreements for which Magellan
has agreed to administer, manage or arrange for the provision of behavioral
health services. Under the Provider Services Agreement, CBHS' preferred provider
designation would exist for the lesser of 10 years or for so long as CBHS
maintains certain specified participation requirements, and would be subject to
limitations set forth under the benefit agreements of Magellan's patients, by
payors and under applicable law. Although each Member would continue to have the
right to choose its behavioral health care providers, the designation of CBHS as
preferred provider means that facilities of CBHS that meet a Member's needs
would be the first recommended by Magellan to such Member at the time the Member
is provided with a list of alternative providers.
Provided the regulatory provisions discussed below are enacted in a form
conducive to the successful completion of such agreement, CBHS and Magellan also
will enter into a five-year services purchase agreement (the "Services Purchase
Agreement"), under which Magellan would purchase, each contract year, certain
designated levels of inpatient and outpatient services from CBHS. CBHS would be
entitled to receive a service fee from Magellan in the event less than the
annual designated level of services (including permitted carry forwards) was
purchased. Under the Service Purchase Agreement, CBHS would be obligated to
maintain existing inpatient facilities and services and to develop and implement
additional services and facilities.
Pursuant to a support agreement (the "Support Agreement") entered into
by Crescent Operating and Magellan, Crescent Operating has agreed, among other
things, to advance to CBHS any amounts necessary to pay expenses incurred in
connection with obtaining financing to meet CBHS' payment obligations under the
Purchase Agreement. Any amounts advanced to CBHS in connection with the payment
of financing expenses are to be repaid by CBHS to Crescent Operating in
accordance with the provisions of a repayment agreement. Additionally, in the
event the financing proceeds received by CBHS are less than $280 million, plus
the amount of any advances from Magellan to CBHS or its subsidiaries payable by
CBHS at the closing of the transactions contemplated by the Purchase Agreement
(the "Target Amount"), Crescent Operating will purchase, on the closing date of
any such financing, the amount of CBHS securities offered in the financing,
(which amount shall not exceed $25 million) necessary to cause the financing
proceeds to equal the Target Amount. If, as a result of the failure by CBHS to
obtain funds equal to the Target Amount, (i) the transactions contemplated by
the Purchase Agreement are not consummated within the time periods specified in
the Purchase Agreement or (ii) the Purchase Agreement is terminated, Crescent
Operating has agreed to pay to Magellan a termination fee in the amount of $5.0
million ($2.5 million of which would be payable in cash and $2.5 million of
which would be payable in shares of Crescent Operating common stock).
The obligations of Crescent Operating under the Equity Purchase
Agreement and the Support Agreement are conditioned upon (i) the effectiveness
of the interim final rule, relating to the existing statutory shared risk safe
harbor (the "Shared Risk Exception"), as stated in the notice of publication and
(ii) the execution of the Services
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Purchase Agreement. In the event the Shared Risk Exception, as enacted, is not
in the same form as the text of the statement issued on January 22, 1998 by the
Health and Human Services Negotiated Rulemaking Committee, the Services Purchase
Agreement may be modified so that it complies with the enacted Shared Risk
Exception. No such modification will be made, however, if it would result in any
material loss of the proposed benefits to be provided under the Services
Purchase Agreement.
Additionally, the obligations of Crescent Operating to consummate the
transactions contemplated by the Equity Purchase Agreement are conditioned upon
the consummation of the transactions referenced in the Purchase Agreement.
Provided that each of the conditions is met, it is anticipated that the
transactions contemplated by both the Equity Purchase Agreement and the Purchase
Agreement will close in the second or third quarter of 1998. The Company does
not have any current alternative plans concerning CBHS if those transactions
fail to close.
OTHER TRANSACTIONS
On March 25, 1998, the Company was offered by Crescent Partnership the
opportunity to acquire an interest in certain acreage on which the sports arena
is to be erected in Dallas, Texas for the Dallas Mavericks, a National
Basketball Association club, and the Dallas Stars, a National Hockey League
club, along with an interest in certain surrounding acreage that may be
developed for commercial purposes as well as an equity interest in the sports
arena. The Intercompany Committee of the Board of Directors has approved the
Company's acceptance of the offer, subject to negotiation of satisfactory terms.
On February 25, 1998, the Company signed a letter of intent to purchase
certain assets of Central Texas Equipment Co., a company which is engaged in
construction equipment sales, leasing and servicing, for a purchase price of
approximately $6.1 million. Crescent Operating anticipates that the purchase
price will consist of 50% cash and 50% shares of Crescent Operating common
stock. The transaction is subject to a number of customary closing conditions.
On February 4, 1998, The Ventana Country Inn closed its operations due
to a landslide that washed out Highway 1, the major access road to the property.
Management expects Highway 1 and The Ventana Country Inn to be re-opened by May
1, 1998, although there can be no assurance that there will not be unforeseen
delays. The Company's loss is partially covered by its business interruption
insurance, although management estimates that the Company's uninsured portion of
the loss will be in the range of $100,000 to $350,000.
On January 23, 1998, a subsidiary of the Company signed a 10-year lease
agreement with Crescent Partnership for the Austin Omni Hotel. The Austin Omni
Hotel is a 314-room full-service hotel located approximately four blocks from
the State Capital Building in Austin, Texas. The terms of the lease agreement
are generally consistent with other hospitality leases with Crescent
Partnership.
On January 16, 1998, Crescent Equities entered into a plan of merger
pursuant to which Station Casinos, Inc. ("Station") will merge (the "Merger")
with and into Crescent Equities. As part of the transactions associated with the
Merger, it is presently anticipated that certain operating assets and employees
of Station will be transferred to a limited liability company (the "LLC")
immediately prior to the Merger. While Crescent Operating has not been offered a
member interest in the LLC, Crescent Equities has stated that it intends to
offer such interest in the LLC to Crescent Operating. The Station Merger has not
been finalized and consummation is subject to various conditions, including,
among other customary conditions, (i) obtaining the requisite consents and
approvals of governmental and other entities, (ii) obtaining the approval of
Station common stockholders, (iii) the effectiveness of the Crescent Partnership
registration statement to be filed in connection with the Station Merger and
(iv) the execution by Station management of certain ancillary agreements. There
can be no assurances that Crescent Operating will accept the interest in the LLC
or that the Merger will be consummated.
STRATEGY
Crescent Operating's strategy is to increase shareholder value through
the development of a strong, independent, diversified management company. While
the Company has obtained and may continue to obtain much of its Assets through
the Intercompany Agreement with Crescent Partnership, it intends to pursue
additional and similar opportunities with Crescent Equities and others in the
future. The additional opportunities Crescent Operating may pursue may be
unrelated to any business in which Crescent Equities is then engaged or plans to
be engaged at any future date.
By utilizing professional managers with experience in the individual
businesses it owns, Crescent Operating works to improve the margins of those
businesses and thereby improve its return. In most of the
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transactions with Crescent Partnership, where Crescent Operating's ownership
comes through a lessee relationship, the profit after rent paid to Crescent
Partnership is Crescent Operating's. Due to the low entry cost to Crescent
Operating and the ability to improve profit margins, the effect on the rate of
return to Crescent Operating could be substantial. Another advantage that
Crescent Operating gains through the Intercompany Agreement is the ability to
have access to numerous acquisitions without the burden of an acquisition staff,
and the ability to participate in large acquisitions that would not be available
to Crescent Operating. In these acquisitions, Crescent Partnership performs all
the research and due diligence and where it elects to participate, Crescent
Operating pays only its proportionate share of the acquisition costs.
Crescent Operating allows investors the opportunity to invest in the
operational side of certain Crescent Equities transactions. Crescent Operating
intends to continue to evaluate and, where beneficial to Crescent Operating,
enter into transactions offered by Crescent Partnership because it cannot, due
to the status of Crescent Equities as a Real Estate Investment Trust ("REIT").
All acquisitions under the Intercompany Agreement are approved by a committee of
Crescent Operating directors independent of Crescent Equities.
THE INTERCOMPANY AGREEMENT
Crescent Operating and Crescent Partnership have entered into the
Intercompany Agreement to provide each other with rights to participate in
certain transactions. The Intercompany Agreement provides, subject to certain
terms, that Crescent Partnership will provide Crescent Operating with a right of
first refusal to become the lessee of any real property acquired by Crescent
Partnership if Crescent Partnership determines that, consistent with Crescent
Equities' status as a REIT, it is required to enter into a "master" lease
arrangement. Crescent Operating's right of first refusal under the Intercompany
Agreement is conditioned upon the ability of Crescent Operating and Crescent
Partnership to negotiate a mutually satisfactory lease arrangement and Crescent
Partnership must have determined, in its sole discretion, that Crescent
Operating is qualified to be the lessee. For example, Crescent Equities
generally would be required, consistent with its status as a REIT, to enter into
a master lease arrangement as to hotels and behavioral healthcare facilities. In
general, a master lease arrangement is an arrangement pursuant to which an
entire property or project (or a group of related properties or projects) is
leased to a single lessee. As to opportunities for Crescent Operating to become
the lessee of any assets under a master lease arrangement, the Intercompany
Agreement provides that Crescent Partnership must provide Crescent Operating
with written notice of the lessee opportunity. During the 30 days following such
notice, Crescent Operating has a right of first refusal with regard to the offer
to become a lessee and the right to negotiate with Crescent Partnership on an
exclusive basis regarding the terms and conditions of the lease. If a mutually
satisfactory agreement cannot be reached within the 30-day period (or such
longer period to which Crescent Operating and Crescent Partnership may agree),
Crescent Partnership may offer the opportunity to others for a period of one
year thereafter before it must again offer the opportunity to Crescent
Operating, in accordance with the procedures specified above. In practice, the
fast-paced acquisitions of Crescent Partnership have required Crescent Operating
to waive the 30-day period. Crescent Partnership may, in its discretion, offer
any investment opportunity other than a lessee opportunity to Crescent
Operating, upon such notice and other terms as Crescent Partnership may
determine. Crescent Operating has been offered lessee and other opportunities
for the 42.5% general partner interest in Woodlands Operating, the Ventana
Country Inn, the Four Seasons Hotel in Houston, the two-thirds interest in the
Houston Center Athletic Club Venture, and all of the voting stock (representing
5% of the equity) in Desert Mountain Development, The Woodlands Land Company,
Inc. and Crescent CS Holdings Corp. and Crescent CS Holdings II Corp. (which
hold interests in Desert Mountain, Woodlands Land Development Company, URS
Logistics and Americold Corporation, respectively). Crescent Operating has
accepted each of these opportunities following negotiation of terms with
Crescent Partnership and review by the Intercompany Committee of the Board of
Directors, a committee whose membership consists of directors unassociated with
Crescent Partnership or Crescent Equities.
Under the Intercompany Agreement, Crescent Operating has agreed not to
acquire or make (i) investments in real estate which, for purposes of the
Intercompany Agreement, includes the provision of services related to real
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estate and investment in hotel properties, real estate mortgages, real estate
derivatives or entities that invest in real estate assets or (ii) any other
investments that may be structured in a manner that qualifies under the federal
income tax requirements applicable to REITs, unless it has provided written
notice to Crescent Partnership of the material terms and conditions of the
acquisition or investment opportunity, and Crescent Partnership has determined
not to pursue such acquisitions or investments either by providing written
notice to Crescent Operating rejecting the opportunity within 10 days from the
date of receipt of notice of the opportunity or by allowing such 10-day period
to lapse. Crescent Operating also has agreed to assist Crescent Partnership in
structuring and consummating any such acquisitions or investments which Crescent
Partnership elects to pursue, on terms determined by Crescent Partnership. In
addition, Crescent Operating has agreed to notify Crescent Partnership of, and
make available to Crescent Partnership, investment opportunities developed by
Crescent Operating, or of which Crescent Operating becomes aware but is unable
or unwilling to pursue. Crescent Operating has not yet notified Crescent
Partnership of any such opportunities.
HOSPITALITY
At December 31, 1997, the Hospitality segment consisted of (i) RoseStar
Management LLC, ("RoseStar") which, directly or indirectly through its
subsidiaries, is the lessee of the Denver Marriott City Center, the Hyatt
Regency Beaver Creek, the Hyatt Regency Albuquerque, Canyon Ranch - Tucson,
Canyon Ranch - Lenox, the Ventana Country Inn and the Sonoma Mission Inn and
Spa, and (ii) 100% of the common stock of COI Hotel Group, Inc. ("COI Hotel"),
which is the lessee of the Four Seasons Hotel in Houston, Texas and has a
two-thirds interest in the Houston Athletic Club Venture.
The hotels and resort properties (the "Hospitality Properties") in which
Crescent Operating has an interest make up a relatively small portion of the
hospitality industry, as the Company is focused on first class properties in
niche markets. As Crescent Operating, for the most part, relies on third-party
operators such as Four Seasons, Marriott and Hyatt, the Company enjoys the
advantage of the third-party operators' nationwide advertising and reservation
services.
The Company could be adversely affected by downturns in the hospitality
industry as Crescent Operating has guaranteed base rent payments to Crescent
Partnership. The individual Hospitality Properties are affected by seasonality;
however, the seasonal fluctuations are varied and are determined by both
location and the nature of the business conducted on the property. The effects
of seasonality on the properties generally offset each other, however the months
which most affect the Company's consolidated results are November and December.
Crescent Operating, through its subsidiaries, has asset management
agreements (the "Asset Management Agreements") with The Varma Group, such that
The Varma Group is the exclusive asset manager of the Company's Hospitality
Properties. The principals of The Varma Group are Johanna Varma and Sanjay
Varma. Sanjay Varma is a Vice President of the Company and President of the
Hospitality and Woodlands divisions of the Company. Under the Asset Management
Agreements, the Varma Group's duties include, among others: (i) obtaining
required government licenses, permits, consents and approvals; (ii) obtaining
required consents and approvals of associations or other private entities or
persons necessary for the operation of the hotel properties and related assets;
(iii) preparing operating and capital budgets for the leased properties; (iv)
assembling, organizing and maintaining records of the properties' operations and
activities; (v) preparing written progress reports reflecting significant
developments affecting the properties; and (vi) formulating policies, strategies
and tactics for carrying out the Company's duties under the leases.
As consideration for its services under the Asset Management Agreements
(which expire on January 30, 2000 , The Varma Group receives an annual base fee
of approximately $.7 million, plus annual cost of living adjustments for its
asset management services related to the Hyatt Albuquerque, the Hyatt Beaver
Creek, Sonoma Mission Inn and the Denver City Center Marriott (the "Covered
Properties"). In addition, The Varma Group will be reimbursed for its costs
incurred in providing asset management to the other Hospitality Properties.
Travel expenses related to the Covered Properties in excess of $83,600 per year
are reimbursed to The Varma Group as well as all travel expenses related to the
other Hospitality Properties. The Asset Management Agreements are terminable for
cause by either party and may be terminated without cause by the applicable
subsidiary (and, after
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January 31, 2000, by The Varma Group) upon giving prior notice as specified in
the Asset Management Agreements. In the event a subsidiary exercises its rights
to terminate an Asset Management Agreement without cause before January 31,
2000, however, the subsidiary must deliver, or cause to be delivered, to The
Varma Group, a termination fee in an amount to be determined in accordance with
a formula based on the value of the unexpired contract. In 1997, The Varma Group
received $275,000 in fees from the Company.
All of the Company's properties except for the Sonoma Mission Inn and
Spa and the Ventana Country Inn are managed by third party operators. Sonoma
Mission Inn and Spa and the Ventana Country Inn are managed by the Company with
asset management oversight provided by The Varma Group.
Under the leases, each having a term of 10 years, the Company's
subsidiaries have assumed the rights and obligations of the property owner under
the respective management agreement with the hotel operators, as well as the
obligation to pay all property taxes and other charges against the property. As
part of each of the lease agreements for eight of the Hospitality Properties,
Crescent Equities, or a subsidiary of Crescent Equities, has agreed to fund all
capital expenditures relating to furniture, fixtures and equipment reserves
required under the applicable management agreements. The only exception is
Canyon Ranch-Tucson, in which RoseStar owns all furniture, fixtures and
equipment associated with the property and will fund all related capital
expenditures.
ROSESTAR MANAGEMENT, LLC
Effective July 31, 1997, Crescent Operating entered into a series of
transactions (the "RoseStar Transactions"), pursuant to which the Company
acquired for $2.0 million in cash the following assets: (i) 100% of the
membership interests in RoseStar and (ii) all of the common stock, $.01 par
value, of each of RSSW Corp. ("RSSW") and RSCR Arizona Corp. ("RSCR"). RoseStar
and its affiliates previously were owned by each of Gerald Haddock, John Goff
and Sanjay Varma in the ratios of 4.5%, 4.5% and 91% respectively. Mr. Haddock
is the President, Chief Executive Officer and a director, and Mr. Goff is Vice
Chairman and a director, of each of Crescent Operating and Crescent Equities.
Mr. Haddock also is the President and sole director of the general partner of
Crescent Partnership.
Prior to the consummation of the RoseStar Transactions, the Company
obtained a valuation of RoseStar, RSSW and RSCR from an independent national
accounting firm. After considering the valuation and terms of the RoseStar
Transactions, including the $2.0 million aggregate purchase price, the
disinterested directors of the Company determined that the RoseStar Transactions
were fair to the Company and in the best interest of its shareholders.
RoseStar is a Texas limited liability company which owns (i) a 99%
non-managing membership interest in RoseStar Southwest, LLC, a Delaware limited
liability company ("RoseStar Southwest"), (ii) a 99% managing membership
interest in Canyon Ranch Leasing, LLC, an Arizona limited liability company
("Canyon Ranch"), and (iii) 100% of the membership interests in Wine Country
Hotel, LLC, a Delaware limited liability company ("Vintage"). Immediately
prior to the consummation of the RoseStar Transactions, and effective as of July
31, 1997, RoseStar acquired its interest in Vintage for a purchase price of
$25,000 cash.
As of December 31, 1997, RoseStar or its subsidiaries were the lessees
under seven lease agreements with Crescent Partnership or other subsidiaries of
Crescent Equities. Those leases are on a triple-net basis during 120-month terms
which expire from December 31, 2004 to October 31, 2006. The leases provide for
the payment to Crescent Partnership or other Crescent Equities subsidiaries of
(i) base rent, with periodic rent increases and (ii) percentage rent based on a
percentage of either gross revenue, room revenue, food and beverage revenue or a
combination of these amounts, above a specified amount.
9
<PAGE> 10
COI HOTEL GROUP, INC.
On September 22, 1997, COI Hotel became the lessee of the Four Seasons
Hotel in Houston, Texas, which is owned by Crescent Equities, and acquired for
$2.4 million (i) a two-thirds interest in the Houston Center Athletic Club
Venture ("HCAC"), a joint venture that owns the Houston Center Athletic Club and
(ii) a $5.0 million note executed by the HCAC. The HCAC note bears interest at
LIBOR plus one percent and interest is payable in arrears at the end of each
twenty-eight (28) day period. The Company partially financed these transactions
with proceeds of $1.8 million in loans from Crescent Partnership. The lease for
the hotel provides for the payment to Crescent Partnership or its subsidiaries
of (i) base rent, with periodic rent increases, (ii) percentage rent based on a
percentage of gross hotel revenues less food and beverage revenues above a
specified amount and (iii) a percentage of gross food and beverage revenues
above a specified amount.
On January 23, 1998, COI Hotel signed a 10 year lease agreement with
Crescent Partnership for the Austin Omni Hotel. The Austin Omni Hotel is a
314-room full-service hotel located approximately four blocks from the state
capital building in Austin, Texas. The terms of the lease agreement are
generally consistent with other hospitality leases with Crescent Partnership,
providing for payment of base rent and percentage rent.
OPERATIONAL STATISTICS
The following table sets forth certain information about the properties in
the Hospitality Segment (the "Hospitality Properties"), excluding the interest
in HCAC, for the years ended December 31, 1997 and 1996. The information for the
Hospitality Properties is based on available rooms, except for Canyon
Ranch-Tucson and Canyon Ranch-Lenox, which are destination health and fitness
resorts that measure performance based on available guest nights.
<TABLE>
<CAPTION>
Revenue Per
Average Average Daily Available Room
Year Occupancy Rate Rate ("ADR") ("REVPAR")
Completed/ ----------------- ------------------ ----------------
Full-Service/Luxury Hotels Renovated Rooms 1997 1996 1997 1996 1997 1996
- -------------------------- --------- ----- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hyatt Regency Beaver Creek ......... 1989 295 66% 67% $229 $207 $151 $139
Denver Marriott City Center ........ 1982 613 80 79 117 108 94 85
Hyatt Regency Albuquerque .......... 1990 395 74 77 98 93 73 71
Sonoma Mission Inn & Spa ........... 1927/1987/1997 198 87(5) 92 210 181 183 166
Four Seasons Hotel Houston ......... 1982 399 67 65 161 142 108 93
Ventana Country Inn ................ 1975/1982/1988 62 84 83 337 312 282 258
-------------------------------------------------------------------------
Total/Weighted Average 1,962 75% 75% $155 $141 $116 $106
=========================================================================
Destination Health & Fitness Resorts
- ------------------------------------
Canyon Ranch-Tucson ................ 1980 250(1) 81%(2) 80%(2) $503(3) 479(3) $387(4) 366(4)
Canyon Ranch-Lenox ................. 1989 202(1) 80(2) 81(2) 445(3) 407(3) 347(4) 320(4)
-------------------------------------------------------------------------
Total/Weighted Average 452 81% 81% $477 $446 $370 $345
=========================================================================
</TABLE>
(1) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(2) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(3) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the
period.
(4) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
(5) Includes, for the period from July 1, 1997 through December 31, 1997, 30
additional rooms completed in July 1997.
10
<PAGE> 11
The following table sets forth average occupancy rate, average daily
rate and revenue per available room for the Hospitality Properties by
full-service hotels and destination health and fitness resorts for each of the
years ended December 31, 1993 through 1997. The information for the Hospitality
Properties is based on available rooms, except for Canyon Ranch-Tucson and
Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure performance based on available guest nights and calculate occupancy,
average daily rate and revenue per available room as described in the notes of
the preceding table.
<TABLE>
<CAPTION>
For The Year Ended December 31,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY HOTELS
Average Occupancy .................... 73% 73% 77% 75% 75%
Average Daily Rate ................... $111 $117 $122 $141 $155
Revenue Per Available Room ........... $ 81 $ 85 $ 93 $106 $116
DESTINATION HEALTH AND FITNESS RESORTS
Average Occupancy .................... 78% 78% 77% 81% 81%
Average Daily Rate ................... $393 $418 $437 $446 $477
Revenue Per Available Room ........... $290 $312 $321 $345 $370
</TABLE>
INDUSTRY INFORMATION
The U.S. hotel industry is experiencing a resurgence in profitability
from its downturn in the early 1990's. Increased demand for luxury and
destination resort hotel rooms has been met with very limited increase in the
supply of such rooms, resulting in increasing occupancies and room rates.
According to Smith Travel Research, average occupancies for hotel rooms rose
from 62.7% in 1992 to 64.6% in 1997. Average hotel room rental rates grew 6.1%,
6.3% and 4.9%, in 1997, 1996, and 1995, respectively. Within the luxury and
upscale segments of the industry, average occupancy increased approximately 7.4%
and 2.9%, respectively, between 1992 and 1997, while average room rental rates
increased approximately 32.0% and 25.0%, respectively, during the same period.
Business and convention travel accounts for about two-thirds of room
demand and has risen along with the improving economy and increased corporate
profits. Domestic leisure travel has also increased, especially among the "baby
boomers" who are not only at the prime age for leisure travel but also have a
greater tendency to travel than previous generations. A healthier, more active
senior population is also contributing to the increased travel.
With the aging of the "baby boomer" generation and the growing interest
in quality of life activities, the resort/spa industry also is experiencing
significant growth in the United States.
The average annual growth rates in REVPAR, from 1992 through 1997, for
the upscale and luxury hotel segments were 5.2% and 7.2%, respectively,
according to Smith Travel Research. This demand comes not only from the business
and convention sector, but also from the leisure traveler who vacations
increasingly at higher-end hotels.
11
<PAGE> 12
The following table sets forth hotel REVPAR by price segment for the years 1992
through 1997.
<TABLE>
<CAPTION>
Annual
Average
1992 1993 1994 1995 1996 1997 Growth Rate
---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Luxury(1).... $69.43 $73.40 $79.15 $83.93 $92.31 $98.33
% Change... 5.7% 7.8% 6.0% 10.0% 6.5% 7.2%
Upscale...... $46.70 $49.20 $51.76 $54.28 $57.42 $60.05
% Change... 5.4% 5.2% 4.9% 5.8% 4.6% 5.2%
Mid-Priced... $34.78 $35.71 $37.57 $39.70 $41.84 $44.20
% Change... 2.7% 5.2% 5.7% 5.4% 5.6% 4.9%
Economy...... $25.45 $26.16 $27.27 $28.64 $29.63 $30.45
% Change... 2.8% 4.2% 5.0% 3.5% 2.8% 3.7%
Budget....... $21.53 $21.80 $22.75 $23.77 $24.40 $25.07
% Change... 1.3% 4.4% 4.5% 2.7% 2.7% 3.1%
</TABLE>
(1) Does not include destination health and fitness resorts such as the Canyon
Ranch resorts.
Source: Smith Travel Research
LAND DEVELOPMENT
At December 31, 1997, the Land Development segment consisted of (i) 100%
of the voting stock, representing a 5% interest, of Desert Mountain Development
Corporation ("Desert Mountain Development"), which is the sole general partner
of Desert Mountain Properties Limited Partnership ("Desert Mountain
Properties"), which owns Desert Mountain, a master planned, luxury residential
and recreational community in northern Scottsdale, Arizona, (ii) a 42.5% general
partner interest in The Woodlands Operating Company, L.P. ("Woodlands
Operating"), which provides management, advisory, landscaping and maintenance
services to entities affiliated with Crescent Operating and Crescent Equities
and (iii) 100% of the voting stock, representing a 5% interest, of The Woodlands
Land Company, Inc. ("LandCo"), which holds a 42.5% general partner interest in
The Woodlands Land Development Company L.P. ("Landevco"), which owns
approximately 9,000 acres for commercial and residential development as well as
a realty office, an athletic center, and interests in both a title company and a
mortgage company.
The Land Development segment faces competition from other local
developments. Both Desert Mountain and The Woodlands have golf courses where
major tournaments are played, The Tradition and The Shell Houston Open,
respectively, as well as club houses and other amenities. Management believes
that these attributes help to distinguish Desert Mountain and The Woodlands from
their competition. The Woodlands could be adversely affected by downturns in the
Houston economy. Management believes that Desert Mountain is not directly
affected by its local economy, as it is a luxury development and many of the
purchases are not made by local residents. A downturn in the economy as a whole
could adversely affect its success.
DESERT MOUNTAIN
Pursuant to a purchase agreement dated as of September 29, 1997, the
Company acquired 100% (50 shares) of the voting common stock (the "Voting
Stock") of Desert Mountain Development. The Voting Stock was purchased from
Crescent Partnership for a cash purchase price of approximately $2.2 million.
The purchase price for the Company's interest in Desert Mountain Development
represents 5% of the total amount invested in Desert Mountain Development by
Crescent Partnership. Crescent Partnership currently owns 100% (950 shares) of
the non-voting common stock of Desert Mountain Development. Together, the
Company and Crescent Partnership own 100% of the equity in Desert Mountain
Development.
Pursuant to the terms of a limited partnership agreement, Desert
Mountain Development is entitled to receive 93% of the net cashflow (as defined)
of Desert Mountain Properties after certain payments to the sole limited
partner, Sonora Partners Mountain Partnership. The principal owner of Sonora
Partners Mountain Partnership is Lyle Anderson, the original developer of Desert
Mountain. Desert Mountain Partnership has entered into an advisory agreement
with the Lyle
12
<PAGE> 13
Anderson Company pursuant to which Mr. Anderson provides advisory services in
connection with the operation and development of Desert Mountain.
Desert Mountain is an 8,300-acre property that is zoned for the
development of approximately 4,500 lots, approximately 1,500 of which have been
sold. The current plans for Desert Mountain, however, contemplate limiting
development in order to maintain the exclusive nature of the community. Desert
Mountain also includes The Desert Mountain Club, a private golf, tennis and
fitness club which serves over 1,600 members and offers four Jack Nicklaus
signature 18-hole golf courses. One of these courses is Cochise, the site of the
Senior PGA Tour's The Tradition golf tournament.
THE WOODLANDS OPERATING COMPANY
On July 31, 1997, Crescent Operating, through its newly-formed
subsidiary, WOCOI Investment Company, acquired for approximately $.4 million, a
42.5% general partner interest in Woodlands Operating. The acquisition was part
of a larger transaction (the "Woodlands Transaction"), pursuant to which
Crescent Equities and certain Morgan Stanley funds (the "Morgan Stanley Group")
acquired The Woodlands Corporation. The purchase price of the Company's interest
in Woodlands Operating was determined by mutual agreement of the parties to the
Woodlands Transaction. WOCOI Investment Company serves as the managing general
partner of Woodlands Operating.
The Woodlands Corporation was the principal owner, developer and
operator of The Woodlands, an approximately 27,000-acre master-planned
residential and commercial community located approximately 27 miles north of
Houston, Texas. The Woodlands includes a shopping mall, retail centers, office
buildings, a conference center and country club and other amenities. The Company
obtained the opportunity to purchase its interest in Woodlands Operating from
Crescent Equities pursuant to the Intercompany Agreement.
Woodlands Operating was formed to provide management, advisory,
landscaping and maintenance services to entities affiliated with Crescent
Operating and Crescent Equities as well as to third parties. Pursuant to the
terms of five written service agreements, Woodlands Operating performs general
management, landscaping and maintenance, construction, design, sales,
promotional and other marketing services for the properties in which Crescent
Equities acquired a direct or indirect interest as a result of the Woodlands
Transaction. In addition, Woodlands Operating monitors certain of the real
estate investments of, and provides advice regarding real estate and development
issues to, such entities. As compensation for its management and advisory
services, Woodlands Operating will be paid a monthly advisory fee in an amount
equal to 3% of all costs and expenses incurred by Woodlands Operating in
providing such services. As compensation for its landscaping and maintenance
services, Woodlands Operating will receive a monthly fee in an amount equal to
5% of the cost per month of performing the required landscaping and maintenance
services. Each service agreement provides for an initial term of at least 12
months (subject to earlier termination under certain circumstances) and will be
renewed automatically, unless terminated by either party upon giving prior
notice as specified in each agreement.
The assets of Woodlands Operating consist primarily of the following
direct and indirect subsidiaries: (i) MND Hospitality, Inc., an entity the
assets of which are solely related to its employee benefit plans; (ii) MND
Hospitality Services Corp., an entity used to record the expenses of temporary
employees; (iii) BOCH General Partnership, the assets of which include certain
equipment, personal property and contract rights; (iv) WECCR General Partnership
("WECCR GP") and (v) WECCR, Inc., a Texas corporation which owns 1% general
partner interests in both BOCH General Partnership and WECCR GP.
WECCR GP leases the Woodlands Conference Center and Country Club, a
364-room executive conference center with a private golf and tennis club serving
approximately 1,600 members and offering 81 holes of golf, and certain related
assets (the "Conference Center") from The Woodlands Commercial Properties
Company, L.P. ("Woodlands Commercial"), a partnership, the interests of which
are owned by Crescent Equities and the Morgan Stanley Group. Pursuant to the
lease agreement, Woodlands Commercial has assigned to WECCR GP substantially all
of its interest in and to third-party contracts and agreements relating to the
operation of the Conference Center. WECCR GP leases the Conference Center on a
triple net basis and will pay base rent in the amount of $.75 million
13
<PAGE> 14
per month during the eight-year term of the lease. The lease also provides for
the payment of percentage rent for each calendar year in which gross receipts
from the operation of the Conference Center exceed certain amounts.
THE WOODLANDS LAND COMPANY, INC.
On September 29, 1997, the Company acquired from Crescent Partnership,
for approximately $2.2 million, all of the voting stock, representing a 5%
economic interest, in LandCo. The purchase price for the Company's interest in
LandCo represents 5% of the total amount invested in LandCo by Crescent
Partnership. Crescent Partnership currently owns 100% of the non-voting common
stock, representing a 95% economic interest of, LandCo. Together, the Company
and Crescent Partnership own 100% of the equity in LandCo.
LandCo is a newly-formed residential and commercial development
corporation which was formerly wholly owned by Crescent Partnership. LandCo
holds a 42.5% general partner interest in, and is the managing general partner
of, Landevco, a Texas limited partnership in which certain Morgan Stanley funds
hold a 57.5% partner interest. LandCo's general partner interest in Landevco is
subject to adjustment to up to 52.5%, in the event LandCo achieves certain
levels of profitability and the Morgan Stanley funds receive certain rates of
return on their investment in Landevco. Landevco primarily owns (i)
approximately 6,400 acres of land capable of supporting the development of more
than 20,000 lots for single-family homes, (ii) approximately 2,500 acres capable
of supporting more than 21.5 million net rentable square feet of commercial
development, (iii) a realty office, (iv) contract rights relating to the
operation of its property, (v) an athletic center, (vi) a 49% interest in a
mortgage company and (vii) a 50% interest in a title company.
OPERATIONAL STATISTICS
The following table sets forth certain information as of December 31,
1997 relating to the residential development properties.
<TABLE>
<CAPTION>
Total Total Average
Total Lots/Units Lots/Units Closed
Lots/ Developed Closed Sale Price
Units Since Since Per Lot/ Range of Proposed
Land Development Planned Inception Inception Unit Sale Prices Per Lot(1)
- ------------------------------ ------- ---------- ---------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
Desert Mountain .............. 2,573 1,797 1,539 $ 327,500 $150,000-$2,500,000
The Woodlands ................ 38,313 18,508 17,268 $ 40,000 $13,000-$250,000
------- ---------- ----------
Total Land Development ....... 40,886 20,305 18,807
======= ========== ==========
</TABLE>
(1) Based on existing inventory of developed lots and lots to be developed.
EQUIPMENT SALES AND LEASING
On May 9, 1997, Crescent Operating acquired all of the common stock of
Moody-Day for approximately $4.1 million. Moody-Day is engaged in the sale,
leasing and service of construction equipment and accessories to the
construction and utility industries located primarily in Texas. Moody-Day's
leasing activities consist principally of leasing construction equipment and
accessories under various leases, including certain non-cancelable operating
leases and sales-type leases.
Effective December 1, 1997, Crescent Operating acquired the assets of
Preco Machinery Sales, Inc. ("Preco"), a heavy equipment sales and leasing
company based in Houston, Texas. The purchase price of Preco was approximately
$4.0 million and consisted of a cash payment of approximately $1.7 million and
the issuance of 130,000 restricted shares of Crescent Operating common stock.
The transaction was structured such that Preco was contributed to and became a
division of Moody-Day. With the acquisition of Preco, Moody-Day became the
number one dealer of JCB equipment in the United States with five locations
throughout the state of Texas including Dallas, Houston, Beaumont, San Antonio
and Corpus Christi.
14
<PAGE> 15
Moody-Day's inventory available for sale or lease is supplied pursuant
to various distributor or dealer agreements. Moody-Day believes that the terms
and conditions of these agreements are consistent with industry standards.
Moody-Day's operations are not notably seasonal, although adverse weather
conditions, such as extended periods of precipitation, could adversely affect
its operations.
Moody-Day competes with various large and small companies. Moody-Day
believes that the principal competitive factors in its markets for sale and
rental of the construction equipment and accessories it offers are availability
of requested equipment, price and product features. Moody-Day's products and
services are marketed directly by its 20-person sales force. No customer
accounted for more than 10% of Moody-Day's gross sales for the period ended
December 31, 1997, with the exception of Austin Commercial, a commercial
construction contractor, which accounted for approximately 11% of Moody-Day's
sales for that period.
The management of Moody-Day is focused on increasing the rental and
leasing components of Moody-Day's business, which management believes have the
potential to generate higher profit margins. The Company believes that
Moody-Day's status as an equipment dealer affords it a competitive advantage
because Moody-Day is able to stock rental and leasing equipment at prices
offered only to equipment dealers. Accordingly, the Company believes that
Moody-Day is poised to benefit from the increased margins and net
income that could result from the relatively low unit costs of equipment.
On February 25, 1998, the Company signed a letter of intent to purchase
certain assets of Central Texas Equipment Co. for a purchase price of
approximately $6.1 million. Crescent Operating anticipates that 50% of the
purchase price will be paid in cash and 50% in restricted shares of Crescent
Operating common stock. The transaction is subject to a number of customary
closing conditions.
OPERATIONAL STATISTICS
<TABLE>
<CAPTION>
For The Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Equipment sales and service revenue
as a percentage of total revenue....................... 67% 71% 78% 74% 76%
Equipment rental and leasing as a
percentage of total revenue............................ 33% 29% 22% 26% 24%
Rental and leasing equipment utilization(1).............. 80% 72% 64% 53% 80%
</TABLE>
(1) Rental equipment utilization is calculated as the total equipment rented as
compared to the total equipment available for rent.
INDUSTRY INFORMATION
Heavy equipment sales and leasing has benefited from the consistent
growth of the construction industry over the past 6 years. According to the U.S.
Department of Commerce, total construction spending has increased from $390
billion in 1992 to $525 billion in 1997. Additionally, construction equipment
rental has become increasingly more popular with contractors in the past several
years. Management believes that the ability to have newer, better-maintained
equipment available on demand without having to make the commitment to purchase
has increased job efficiency and cash flow for contractors and that this
accounts for the phenomenal growth in the construction equipment rental
industry. According to Manfredi & Associates, an Illinois-based construction
industry analyst, the rental and leasing industry grew more than 2,500% from
1982 to 1996 with rental income increasing from $614 million to $15 billion
during the same time period. Manfredi & Associates predicts that by the year
2000, 50% of all new construction equipment will be sold to rental centers.
15
<PAGE> 16
HEALTHCARE
On June 17, 1997, Crescent Operating acquired, for $5.0 million, a 50%
membership interest in CBHS. CBHS is a limited liability company which operates
approximately 90 behavioral health care facilities (the "Facilities") and is the
nation's largest operator of acute-care psychiatric hospitals and other
behavioral health care facilities. CBHS has established certain wholly owned
subsidiaries to operate the Facilities.
The Facilities offer a wide array of services, including, in-patient
hospitalization, partial hospitalization and intensive out-patient services.
Additionally, some of the Facilities offer residential treatment services. The
Facilities provide structured and specialized treatment for mental health
disorders and alcohol and drug dependencies in children, adolescents and adults.
Typically, treatment programs at the Facilities integrate the services of
physicians and other medical professionals with testing, group, individual and
occupational therapy and educational programs to provide a comprehensive
approach to treatment.
At CBHS's fiscal year end, approximately 1,118 licensed physicians were
members of the staffs of the Facilities, either as independent contractors or
CBHS employees. The medical staff of each Facility is responsible for
supervising medical operations, subject to the oversight of such Facility by its
board of trustees. CBHS recruits physicians to serve in administrative
capacities at the Facilities and to work in private practice in the communities
where the Facilities are located.
Under CBHS's operating agreement, Crescent Operating and Magellan's
wholly owned subsidiary, Charter, Inc. (collectively, the "Members") each was
required to contribute an additional $2.5 million and to loan $17.5 million in
working capital to CBHS, in addition to each member's original investment.
During 1997, each of the Members made loans (evidenced by promissory notes) to
CBHS in the aggregate principal amount of $17.5 million (the "Initial Amount").
On November 16, 1997, effective September 30, 1997, each of the promissory notes
was exchanged for cumulative redeemable preferred interests (the "Redeemable
Preferred Interests") in CBHS. Each Redeemable Preferred Interest entitles its
holder to a preferred return on the profits of CBHS, which is to be calculated
at the rate of 10% per annum of the Initial Amount, compounded monthly. CBHS
upon approval of at least 80% of the members of its Governing Board, may redeem
all but not less than all of the Redeemable Preferred Interests, at its option,
on or after April 1, 1998, for cash or promissory notes, or a combination
thereof, provided that the holders of the Redeemable Preferred Interests are
treated identically.
CBHS and subsidiaries of CBHS entered into a triple-net operating lease
agreement (the "Facilities Lease") with Crescent Real Estate Funding VII, L.P.
("Crescent Funding"), a subsidiary of Crescent Equities, under which all of the
Facilities are leased by Crescent Funding to CBHS and its subsidiaries. The
initial term of the Facilities Lease is 12 years, with four renewal terms of
five years each. CBHS may renew the Facilities Lease at its option upon notice
at least one year prior to the end of the initial term or any renewal term.
The base rent for the first year of the initial term is $41.7 million.
The base rent increases by 5% compounded annually. At the commencement of any
renewal term of the Facilities Lease, a new fair market rent for the renewal
term will be determined by agreement of the parties, or if the parties are
unable to agree on a fair market rent, then by an appraisal mechanism. Following
appraisal, Crescent Funding will have the right to render void the exercise of
the option to extend the Facilities Lease if Crescent Funding is not satisfied
with the fair market value rent as determined by the appraiser. In addition,
CBHS will pay annually an additional $20 million under the Facilities Lease (the
"Additional Rent"), at least $10 million of which must be used, as directed by
CBHS, for capital expenditures each year and up to $10 million of which may be
used, if requested by CBHS, to cover capital expenditures, property taxes,
insurance premiums and franchise fees. CBHS' failure to pay the Additional Rent
is not a default under the Facilities Lease unless Crescent Funding has
expended, or caused to be expended, funds for unreimbursed capital expenditures,
property taxes, insurance premiums or franchise fees.
Magellan (through a wholly owned subsidiary) has granted a franchise for
each Facility (the "Master Franchise Agreement"), and CBHS has entered into and
caused each subsidiary/lessee of a Facility to enter into a franchise agreement
(the "Subsidiary Franchise Agreements" and, together with the Master Franchise
Agreement,
16
<PAGE> 17
the "Franchise Agreements") for such Facility. Subject to certain conditions,
Magellan has agreed to grant franchises for facilities subsequently acquired,
developed or leased by CBHS, provided such facilities meet reasonable
requirements of Magellan and that Magellan is not contractually or legally
prevented from granting such franchise. CBHS has agreed to guarantee all
obligations of its subsidiaries under Subsidiary Franchise Agreements.
Under the Franchise Agreements, CBHS and its subsidiaries have the right
to use the "CHARTER" System in connection with the management and administration
of health care facilities. Magellan will continue to operate and provide the
toll free 1-800-CHARTER telephone number and call center to provide
substantially the same service to the CBHS franchisees as provided by the call
center to the Facilities when operated by Magellan. The CBHS franchisees will
advertise the 1-800-CHARTER telephone number and otherwise use the call center
as a means of assisting customers to locate the places of business of
franchisees of Magellan.
The initial term of the Master Franchise Agreement is 12 years. CBHS has
the right to renew the Master Franchise Agreement for four additional five-year
renewal terms, provided that at the end of the initial term and each renewal
term, the fees will be adjusted to reflect the fair market value of the
franchise utilized by the Facilities as of the renewal date for the
then-applicable renewal term. The Master Franchise Agreement includes an
appraisal mechanism for determining fair market value franchise fees.
Notwithstanding the foregoing, if the fair market value franchise fee as so
determined is not acceptable to Magellan, then Magellan will have the option to
terminate the Master Franchise Agreement at the end of the then-current term and
the Master Franchise Agreement will not be further extended. In all other
events, neither Magellan nor CBHS, has the right to terminate the Master
Franchise Agreement (whether for breach or otherwise) without the consent of the
other and Crescent Funding.
Franchise fees are payable monthly by CBHS under the Master Franchise
Agreement and equal the greater of (i) $78.2 million, subject to increases for
inflation; or (ii) $78.2 million, plus 3% of CBHS Gross Revenues (as defined in
the agreement) over $1 billion and not exceeding $1.2 billion, and 5% of CBHS
Gross Revenues over $1.2 billion. Pursuant to a subordination agreement entered
into by CBHS, Crescent Funding and Magellan, franchise fees, generally, are
subordinated to base rent, the 5% annual increase and the first $10 million of
the Additional Rent. CBHS has not made any franchise fee payments to Magellan
for the months of January, February or March of 1998, and, as a result, is in
default under the Master Franchise Agreement. Management of CBHS anticipates
that franchise fee arrearages will approximate $19.6 million on April 1, 1998.
Pursuant to the terms of, and conditioned upon the consummation of the
transactions contemplated by, the Purchase Agreement, CBHS and Magellan have
agreed to execute an amendment to the Master Franchise Agreement which will
provide, among other things, that the amount of franchise fees payable by CBHS,
during the period from March 3, 1998 through the date of the closing of the
transactions referenced in the Purchase Agreement, will be reduced to $5 million
per month, prorated for any partial month.
In addition to other remedies, whenever franchise fees are past due for
any reason in the amount of $6 million or more, Magellan will have the right to
prohibit any incentive compensation to CBHS management and prohibit any vesting
of CBHS management equity. Whenever fees are past due in the amount of $18
million or more, Magellan will have the right to prohibit any salary increases
for key personnel of CBHS, prohibit any additional hiring by CBHS and prohibit
any new direct or indirect hospital acquisitions or joint ventures
participation. If franchise fees are past due in an amount greater than $24
million, Magellan will have the right to require a 5% cutback on budgeted
expenses under the then-current approved CBHS annual budget, require monthly
approval of expenditures of CBHS by Magellan, including capital and operating
expenditures, and require transfer of control and management of CBHS and CBHS
franchisees to Magellan. To date, Magellan has not exercised any such management
rights or pursued any other remedies in connection with CBHS' franchise fee
arrearages.
Although no franchise fees were past due at any time during 1997, CBHS'
inability, from time to time, to pay the franchise fees it owed necessitated the
incurrence by CBHS of additional advances from Magellan in the amount of $6.2
million (the "Advances"). Pursuant to the terms of the Purchase Agreement, CBHS
is obligated to repay all amounts owed to Magellan or its subsidiaries,
including the Advances, within 180 days of the closing of the transactions
referred to in the Purchase Agreement and the Equity Purchase Agreement. Any
amounts that CBHS fails to pay within such 180-day period will bear interest at
the rate of 9% per annum. CBHS' ability to repay or refinance its indebtedness
will depend on the financial and operating performance of the Facilities. To
secure payment of amounts owed by CBHS to Magellan, CBHS and Magellan will enter
into a security agreement, pursuant to which Magellan will
17
<PAGE> 18
receive a security interest in certain assets and certain future distributions
to which CBHS may be entitled. In the event the transactions contemplated by the
Purchase Agreement and the Equity Purchase Agreement are consummated, annual
franchise fee payments would be eliminated. In the event that the transactions
contemplated by the Purchase Agreement and the Equity Purchase Agreement are not
consummated, there can be no assurance that CBHS will be able to pay franchise
fees as they become due.
Payments are made to CBHS by patients, insurance companies and
self-insured employers, the federal and state governments under Medicare,
Medicaid, Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") and other programs and by HMOs, PPOs and other managed care
programs. Amounts received from most payors are less than the Facilities'
established charges. The approximate percentages of gross patient revenue (which
is revenue before deducting contractual allowances and discounts from
established charges) derived by CBHS from various payment sources for the last
three fiscal years were as follows:
<TABLE>
<CAPTION>
Percentage of Facility Gross Patient
Revenue for the Year Ended
September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Medicare .............................................. 27% 28% 26%
Medicaid .............................................. 18 17 17
-------- -------- --------
45 45 43
HMOs and PPOs ......................................... 24 21 17
CHAMPUS ............................................... 2 3 4
Other Government Programs ............................. 7 6 6
Other (primarily Blue Cross and other commercial) ..... 22 25 30
-------- -------- --------
Total ................................................. 100% 100% 100%
======== ======== ========
</TABLE>
Management anticipates that the percentage of CBHS' revenue obtained
from HMOs, PPOs, other managed care plans and self-insured employers will
increase in the future.
In general, the operation of behavioral health care programs is
characterized by intense competition. The Company anticipates that competition
will become more intense as pressure to contain the rising costs of health care
continues to intensify, particularly as programs such as those operated by CBHS
are perceived to help contain mental health care costs. Each of the Facilities
competes with other hospitals and behavioral health care facilities, some of
which are larger and have greater financial resources than the Facilities. Some
competing facilities are owned and operated by governmental agencies, others by
nonprofit organizations supported by endowments and charitable contributions.
Facilities frequently draw patients from areas outside their immediate locale
and, therefore, the Facilities may, in certain markets, compete with both local
and distant hospitals and other facilities. In addition, the Facilities compete
not only with other psychiatric hospitals, but also with psychiatric units in
general hospitals. With respect to outpatient services, CBHS competes with
private practicing mental health professionals, publicly funded mental health
centers, and partial hospitalization and other intensive outpatient services
programs and facilities. The competitive position of a particular facility is,
to a significant degree, dependent upon the number and quality of physicians who
practice at the facility and who are members of its medical staff.
There can be no assurance that CBHS will be able to compete effectively
with its present or future competitors, and any such inability could have a
material adverse effect on the CBHS' business, financial condition and results
of operations.
The behavioral healthcare business tends to be seasonal, with a higher
demand for services in the first half of the calendar year than in the second
half. Management believes that such seasonality is due, in part, to patients
scheduling vacation in the summer months and not seeking treatment during the
year-end holiday period. Accordingly, CBHS' revenue tends to be lower during the
third and fourth calendar quarters than in the first and second calendar
quarters.
18
<PAGE> 19
See "Recent Developments" for discussion about the pending acquisition
of the remaining 50% of CBHS and other pending items.
OPERATIONAL STATISTICS
<TABLE>
<CAPTION>
For the For the
Quarter Ended December 31, Year Ended September 30,
-------------------------------- ----------------------------------------------------
1997 1996(4) 1997(4) 1996(4) 1995(4)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Average Licensed Beds ............. 7,347 7,403 7,424 7,407 7,289
Net Revenue (1) ................... $175,228,000 $195,896,000 $764,059,000 $818,334,000 $827,119,000
Total Patient Days (2) ............ 325,147 335,794 1,349,730 1,440,913 1,380,354
Total Equivalent Patient Days(3) .. 365,213 380,099 1,523,366 1,603,354 1,548,296
Admissions ........................ 28,596 28,216 118,575 118,057 106,210
Average Length of Stay (Days) ..... 10.9 11.3 11.1 12 12.5
Net Revenue Per Equivalent
Patient Days .................... $ 480 $ 515 $ 502 $ 505 $ 534
</TABLE>
(1) Includes inpatient and outpatient revenue.
(2) Number of 24-hour periods of inpatient care provided.
(3) Patient days plus outpatient revenue, divided by inpatient average daily
rate.
(4) Amounts are based on carve-out financial statements and statistical data of
the Provider Segment. The year ended September 30, 1997, combines the
carved-out information and CBHS for the 106 days ended.
INDUSTRY INFORMATION
In an era of cost-containment and the reduction of dollars available for
care, behavioral healthcare providers have focused attention on developing
treatment approaches that respond to payors' increasing demands for shorter
stays, lower costs, and expanded access to care. Changes in the mix of services,
the prices of services, and the intensity of service are all part of this
response. These changes have also been bolstered by a rapidly expanding science
base, improved medications management, and the growing availability of
non-hospital treatment settings in more and more communities that help to make
it possible to manage complex and severe illnesses in less intensive treatment
settings. One of the effects that the behavioral healthcare industry is
experiencing is an increasing percentage of non-inpatient care. According to the
National Association of Psychiatric Health Systems 1997 Annual Survey Report,
nearly one in four admissions in 1996 was to a service other than inpatient
hospitalization, compared to just one in ten admissions in 1992. Although
non-inpatient services are rapidly growing, total inpatient admissions also have
increased. In general, inpatient and non-inpatient admissions are increasing,
but average length of stay and care costs are decreasing.
Due to these changes in the behavioral healthcare industry, a hospital's
position relative to its competitors has been affected by its ability to obtain
contracts with HMOs, PPOs and other managed care plans for the provision of
health care services. Although such contracts generally provide for discounted
services, pre-admission certification and concurrent length of stay reviews,
they also provide a strong patient referral base. The importance of entering
into contracts with HMOs, PPOs and other managed care companies varies from
market to market and depends upon the market strength of the particular managed
care company.
19
<PAGE> 20
<TABLE>
For the Year Ended December 31,
-----------------------------------------------
1996 1995 1994 1993
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total admissions............................... 476,844 447,525 399,407 325,679
Average length of stay (days).................. 11.5 11.7 10.4 16.2
</TABLE>
Source: National Association of Psychiatric Health Systems 1997 Annual Survey
Report
REFRIGERATED WAREHOUSING
Effective October 31, 1997, Crescent Operating acquired, from Crescent
Partnership, for approximately $8.0 million, 100% of the voting stock,
representing a 5% equity interest, of Crescent CS Holdings Corp. ("CS I") and
Crescent CS Holdings II Corp. ("CS II"). The purchase price for the Company's
interests in CS I and CS II represents 5% of the total amount invested in these
companies by Crescent Partnership. Crescent Partnership owns 100% of the
non-voting common stock of CS I and CS II. Together, the Company and Crescent
Partnership own 100% of the equity of CS I and CS II. CS I holds a 40% general
partner interest in Vornado Crescent Atlanta Partnership ("Atlanta
Partnership"), which owns URS Logistics, Inc., a company that operates and
manages public refrigerated warehouses in the continental United States. CS II
holds a 40% general partner interest in Vornado Crescent Portland Partnership
("Portland Partnership"), which owns Americold Corporation, a company providing
integrated logistics services for the frozen food industry consisting of
warehousing and transportation. The Atlanta Partnership and the Portland
Partnership comprise the business venture among Crescent Operating, Crescent
Equities and Vornado Realty Trust ("Vornado"). Vornado's affiliates own 60%
managing general partnership interests in Portland Partnership and Atlanta
Partnership and certain major decisions of the Partnerships require unanimous
partner approval. If the Company and Vornado fail to reach agreement on any of
the specified major decisions prior to November 1, 2000, Vornado may purchase
the Company's interest at cost (less distributions) plus a 10% per annum return.
During the seven years thereafter, Vornado may set a price for the buy-sell
arrangement, and the Company then may elect either to sell its interest to
Vornado, or to purchase Vornado's interest, at the designated price. After
October 31, 2007, either the Company or Vornado may set a price for the buy-sell
arrangement, and the party who did not set the price may elect either to sell
its interest to the other party, or to purchase the other party's interest, at
the designated price. The exercise of the buy-sell arrangement in one
partnership requires the purchaser under the arrangement to purchase the
interest of the selling party in the other partnership on the same terms. The
business venture owns and operates 80 public refrigerated warehouses
representing over 394 million cubic feet of cold storage capacity. This capacity
represents approximately two-thirds of the public refrigerated warehouse storage
in the United States. The two months of operating results of the Refrigerated
Warehousing segment were not material to the overall results of operations of
the Company for the year ended December 31, 1997.
The companies in the Refrigerated Warehousing segment provide frozen
food manufacturers with refrigerated warehousing and transportation management
services. Refrigerated warehouses are comprised of production and distribution
facilities. Production facilities differ from distribution facilities in that
they typically serve one or a small number of customers located nearby. These
customers store large quantities of processed or partially processed products in
the facility until they are further processed or shipped to the next stage of
production or distribution. Distribution facilities primarily serve customers
who store a wide variety of finished products to support shipment to end-users,
such as food retailers and food service companies, in a specific geographic
market.
Transportation management services offered include freight routing,
dispatching, freight rate negotiation, backhaul coordination, freight bill
auditing, network flow management, order consolidation and distribution channel
assessment. The Refrigerated Warehousing segment's temperature-controlled
logistics expertise and access to both frozen food warehouses and distribution
channels enable its customers to respond quickly and efficiently to
time-sensitive orders from distributors and retailers.
Customers consist primarily of national, regional and local frozen food
manufacturers, distributors, retailers and food service organizations including
Con-Agra, Inc., H.J. Heinz & Co., Kraft Foods and Tyson Foods. Competition is
national, regional and local in nature. The companies in the Refrigerated
Warehousing segment operate in an environment in which breadth of service,
warehouse locations, customer mix, warehouse size, service performance and price
are the principal competitive factors. Since frozen food manufacturers and
distributors incur
20
<PAGE> 21
transportation costs which typically are significantly greater than warehousing
costs, breadth of total logistics services and warehouse location are major
competitive factors. In addition, in certain locations, customers depend upon
pooling shipments, which involves combining their products with the products of
others destined for the same markets. In these cases, the mix of customers in a
warehouse can significantly influence the cost of delivering products to
markets. The size of a warehouse is important because large customers prefer to
have all of the products needed to serve a given market in a single location to
have the flexibility to increase storage in that single location during seasonal
peaks. If there are several warehouse locations which satisfy a customer mix and
size requirements, the Company believes that customers generally will select a
warehouse facility based upon the types of services available, service
performance and price.
The following table shows the location and size of facility for each of
the properties of the companies in the Refrigerated Warehousing segment as of
December 31, 1997:
<TABLE>
<CAPTION>
Total Cubic Total Cubic
Number of Footage Number of Footage
State Properties (in millions) State Properties (in millions)
- --------------- ---------- ---------------- ------------ ------------- ------------------
<S> <C> <C> <C> <C> <C>
Alabama 6 9.9 Missouri 1 4.8
Arkansas 3 9.7 Nebraska 1 2.2
California 11 45.3 New York 1 11.8
Colorado 2 3.3 North Carolina 3 8.5
Florida 5 7.8 Oklahoma 2 2.1
Georgia 6 34.4 Oregon 6 40.4
Idaho 2 18.7 Pennsylvania 2 27.4
Illinois 1 6.0 South Carolina 1 1.6
Indiana 1 9.1 Tennessee 3 9.0
Iowa 2 12.6 Texas 1 17.7
Kansas 2 38.0 Utah 1 8.6
Maine 1 1.8 Virginia 1 1.9
Massachusetts 6 15.2 Washington 6 28.7
Minnesota 1 3.8 Wisconsin 2 14.0
Total 394.3
==================
</TABLE>
OTHER INVESTMENTS
HICKS MUSE TATE & FURST EQUITY FUND II, LP
As part of the Carter-Crowley transaction, Crescent Operating purchased
an approximate 1% limited partner interest in Hicks Muse Tate Furst Equity Fund
II, LP ("Hicks-Muse") from Crescent Equities for $9.6 million. Crescent
Operating participates in Hicks-Muse on an investment-by-investment basis and
does not own an interest in all investments included in the Hicks-Muse
portfolio. In connection with the purchase of the Carter-Crowley Assets,
Crescent Operating assumed Carter-Crowley's commitment to invest $10 million in
Hicks-Muse. As of December 31, 1997, the unpaid principal balance due on the
commitment to invest $10 million in Hicks-Muse was approximately $1.3 million.
This amount is required to be paid by Crescent Operating when called.
As of December 31, 1997, Crescent Operating's investments in the
Hicks-Muse portfolio consisted of investments in the following industries: (i)
manufacturing (18.4%, 52.7% of which consisted of investments in a company that
manufactures copper wire); (ii) communications (65.6%, 82.8% of which consisted
of investments in a radio broadcasting company); (iii) real estate (6.0%, all of
which consisted of investments in a company that provides debt and equity
capital to real estate owners and developers); (iv) financial services (7.1%,
all of which consisted of
21
<PAGE> 22
investments in a foreign insurance company and a small business investment
company); and (v) food (2.9%, all of which consisted of investments in a
chocolate company). The fair value of the Hicks-Muse investment as of December
31, 1997 was approximately $12.8 million.
MAGELLAN WARRANTS
In connection with the transaction in which the Company acquired its 50%
membership interest in CBHS, the Company purchased, for $12.5 million, warrants
to acquire 1,283,311 shares of Magellan common stock for an exercise price of
$30 per share. The Magellan warrants are exercisable in varying increments
beginning on May 31, 1998 and ending on May 31, 2009. Management estimates the
fair value of the warrants, using the Black-Scholes pricing model, to be $16.4
million at December 31, 1997.
EMPLOYEES
As of December 31, 1997, Crescent Operating had no employees. Certain
key corporate executives are employed by Petroleum Financial, Inc. and The Varma
Group and serve Crescent Operating under consulting agreements. See "Certain
Transactions" in the Company's definitive proxy statement to be filed with the
Security and Exchange Commission pursuant to Regulation 14A.
As of December 31, 1997, the following consolidated subsidiaries had
the following employees:
<TABLE>
<S> <C>
Moody-Day................................. 89
RoseStar.................................. 665
Desert Mountain Properties................ 547
-----
1,301
=====
</TABLE>
The Company has excluded employees of CBHS, Woodlands Operating,
Landevco, URS Logistics and Americold Corporation, as these subsidiaries
represent equity investments for financial reporting purposes.
ITEM 2. PROPERTIES
At December 31, 1997, the Company, through its subsidiary, Moody-Day,
owned fee simple interests in two properties. The properties are located in
Dallas and Houston, Texas. The Company, directly or indirectly, also held
leasehold interests in certain facilities, including the Facilities and the
Hospitality Properties (collectively, the "Leased Properties"). Management
believes that each of the Leased Properties is adequately maintained and
suitable for use in its respective capacity. The Company or certain of its
subsidiaries has entered into lease agreements in respect of the Leased
Properties, pursuant to which each respective lessee is responsible for routine
maintenance of the subject property. Except in connection with the Facilities
Lease and the Canyon Ranch-Tuscon Lease, neither the Company, nor its
subsidiaries, is responsible for capital expenditures. Under the Facilities
Lease, CBHS is obligated to pay Additional Rent, at least $10 million of which
is required to be used for capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material litigation nor, to
the knowledge of the Company, is any material litigation currently threatened
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the Registrant's fiscal year ended December 31, 1997.
22
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective June 12, 1997, shares of the Company's common stock were
distributed to shareholders of Crescent Equities and unit holders of Crescent
Partnership of record on May 30, 1997. For Crescent Equities shareholders, the
distribution was made on the basis of one share of Crescent Operating common
stock for every 10 common shares of beneficial interest of Crescent Equities
held on the record date, and for limited partners of Crescent Partnership, the
distribution was made on the basis of one share of Crescent Operating common
stock for every 5 units of limited partnership interest held on the record date.
The Company's common stock, $.01 par value per share, began trading on the OTC
Bulletin Board on June 13, 1997. Effective September 8, 1997, the Company's
common stock was listed on the NASDAQ National Market under the symbol "COPI".
The following table reflects the high and low bid prices of the common
stock for each calendar quarter indicated.
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
June 13 - June 30................ $16.00 $ 3.00
September 30..................... $23.63 $ 12.00
December 31...................... $28.75 $ 16.13
</TABLE>
On June 11, 1997, prior to entering into the credit agreement with
NationsBank, Crescent Operating paid a one-time dividend of approximately $2.4
million to its then sole stockholder, Crescent Partnership, in connection with
the sale of a limited partner interest in the partnership that owned the Dallas
Mavericks. Crescent Operating intends to use its available funds to pursue
investment and business opportunities. Payment of dividends on Crescent
Operating common stock is prohibited under credit agreements the Company has
entered into with Crescent Partnership and NationsBank of Texas, NA
("NationsBank").
On December 17, 1997, the Company issued to Preco Machinery Sales, Inc.,
130,000 unregistered shares of common stock, par value $.01 per share (the
"Shares"), in payment of $2.3 million of the $4.0 million purchase price of
Preco. The Shares were issued in a private placement to fewer than 35 persons
who were unaffiliated with the Company, and who either represented that they
were accredited, or that they had sufficient knowledge and experience in
financial and business matters to evaluate the merits and risks of investing in
the Shares. The Shares may not be sold or otherwise transferred unless they are
registered under the Securities Act of 1933 (the "Act") and applicable state
securities laws or are covered by a registration exemption. Restrictions on the
transfer of the Shares are evidenced by a restrictive legend on the stock
certificate representing the Shares. The Company believes the Shares were exempt
from registration at the time of issuance pursuant to Section 4(2) of the Act.
As of March 30, 1998, there were approximately 340 holders of record
of the common stock of Crescent Operating.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain summary historical financial
information for the Company and for the Carter-Crowley Asset Group (the
"Predecessor"). For purposes of this table, the "Carter-Crowley Asset Group"
consists of Moody-Day and Hicks-Muse. The following information should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 and the Financial Statements and
Supplementary Data included in Item 8.
<TABLE>
<CAPTION>
(Dollars In Thousands)
--------------------------------------------------------------------------------------------
Crescent
Operating, Inc. Carter-Crowley Asset Group (Predecessor)
-------------------- -----------------------------------------------------------------------
For the Period For the Period
From From For the Year Ended December 31,
May 9, 1997 to January 1, 1997 ------------------------------------------------
December 31, 1997 to May 8, 1997 1996 1995 1994 1993
-------------------- ------------------- -------- --------- --------- --------
Operating Data:
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $ 156,882 $ 4,657 $ 10,394 $ 9,147 $ 7,671 $ 6,979
Income (loss) from
operations................. (993) 158 109 89 83 89
Net income (loss)............ (22,165) 25 (111) 79 43 36
Loss per share............... (2.00) -- -- -- -- --
Balance Sheet Data:
Total assets................. $ 585,977 $ 17,483 $ 13,230 $ 5,348 $ 4,578
Total debt................... 258,129 5,405 3,121 1,375 850
Total shareholders' equity... (8,060) 10,925 9,358 3,338 3,289
</TABLE>
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
"Selected Financial Data" and the financial statements and notes thereto,
appearing elsewhere in this report. Historical results and percentage
relationships set forth in "Selected Financial Data" should not be taken as
indicative of future operations of the Company.
The following table sets forth financial data for the Company and the
Predecessor. The years ended December 31, 1996 and 1995 include only the
operations of the Predecessor. The year ended December 31, 1997 includes
operations of the Predecessor from January 1, 1997 through May 8, 1997, and the
operations of the Company from May 9, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------ ------------------------ ----------------------------
REVENUES
<S> <C> <C> <C>
Equipment sales & leasing $ 15,175,077 $ 10,393,683 $ 9,147,242
Hospitality 79,467,764 -- --
Land development 66,896,540 -- --
------------ ------------- -------------
Total revenues 161,539,381 10,393,683 9,147,242
------------ ------------- -------------
OPERATING EXPENSES
Equipment sales & leasing 14,281,979 10,284,710 9,057,849
Hospitality direct expenses 62,541,886 -- --
Hospitality properties rent 16,694,376 -- --
Land Development direct expenses 67,095,042 -- --
General and administrative expenses 1,760,609 -- --
----------- ------------- -------------
Total operating expenses 162,373,892 10,284,710 9,057,849
----------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (834,511) 108,973 89,393
----------- ------------- -------------
INVESTMENT (INCOME) LOSS 16,422,678 -- --
----------- ------------- -------------
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OTHER (INCOME) EXPENSE
Interest expense 5,616,110 356,517 152,631
Interest income (1,763,926) (51,881) (50,394)
Other (161,965) (27,202) (136,783)
------------- ------------ -----------
Total other (income) expense 3,690,219 277,434 (34,546)
------------- ------------ -----------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES (20,947,408) (168,461) 123,939
MINORITY INTERESTS (566,077) -- --
------------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (21,513,485) (168,461) 123,939
INCOME TAX (PROVISION) BENEFIT (626,323) 57,677 (44,783)
------------- ------------ -----------
NET INCOME (LOSS) $ (22,139,808) $ (110,784) $ 79,156
============= ============ ===========
</TABLE>
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Equipment Sales and Leasing
Equipment sales and leasing revenues increased approximately $4.8
million or 46.0% to $15.2 million for the year ended December 31, 1997, compared
to $10.4 million for the year ended December 31, 1996. Approximately $2.3
million of this increase relates to the Company's purchase of Preco which was
effective as of December 1, 1997. The remaining increase in revenue relates to
expansion of equipment rentals and leases. Operating expenses for the Equipment
Sales and Leasing segment increased $4.0 million or 38.9% to $14.3 million for
the year ended December 31, 1997, compared to $10.3 million for the year ended
December 31, 1996. Approximately $2.1 million of this increase relates to the
Company's purchase of Preco which was effective as of December 1, 1997. The
remaining increase in operating expenses relates to the additional costs
incurred as a result of the increase in equipment rental and lease revenue. The
operating margin on the Equipment Sales and Leasing segment increased $.8
million to 5.9% for the year ended December 31, 1997, compared to 1.0% for the
year ended December 31, 1996. The improvement in operating margin can be
attributed to increased operating efficiency as well as reduced depreciation
expense resulting from the allocation of the purchase price of Moody-Day.
Hospitality
Hospitality revenues represent RoseStar and COI Hotel revenues. As the
Company was not involved in the Hospitality segment prior to July 31, 1997,
hospitality revenues of $79.5 million for the year ended December 31, 1997
represent 100% of the increase over the year ended December 31, 1996.
Hospitality direct expenses, which represent costs incurred by the full-service
hotels, as well as destination, health and fitness resorts and Hospitality
Properties rent paid to Crescent Partnership or other Crescent Equities
subsidiaries, are new expenses for the year ended December 31, 1997. Such costs
are attributable to the acquisition and operation of RoseStar and the operations
of COI Hotel.
Land Development
Land development revenues represent revenues from Desert Mountain
Properties prior to the elimination of the 95% minority interest. As the Company
was not involved in the Land Development segment prior to July 31, 1997, land
development revenues of $66.9 million for the year ended December 31, 1997
represent a 100% increase over the year ended December 31, 1996. Land
development direct expenses represent operating costs incurred by Desert
Mountain Properties prior to the elimination of the 95% minority interest. As
the Company was not involved in the
25
<PAGE> 26
Land Development segment prior to July 31, 1997, land development direct
expenses of $67.1 million for the year ended December 31, 1997 represent a 100%
increase over the year ended December 31, 1996.
Healthcare
The Company recognized a $19.6 million loss on its investment in CBHS
for the year ended December 31, 1997. As the Company invested in CBHS on June
17, 1997, there are no prior year amounts for comparative purposes. CBHS'
operating losses have been caused by downward trends in the average length of
stay and net revenue per equivalent patient day, which are consistent with the
general deterioration in the behavioral healthcare industry. The consummation of
the transactions referenced in the Equity Purchase Agreement and the Purchase
Agreement (see "Recent Developments") should eliminate the $78 million annual
franchise fee paid by CBHS to Magellan. Through the elimination of the franchise
fee, management believes CBHS will greatly improve its financial results.
As of September 30, 1997, the Company had made total equity and debt
contributions of $25.0 million in CBHS, including the $17.5 million in
Redeemable Preferred Interests. For financial reporting purposes, the amount of
future losses the Company will recognize with respect to its investment in CBHS
will be limited to the balance of the investment in CBHS. Although the Company's
investment in CBHS totaled only $5.4 million as of December 31, 1997, the
Company anticipates that it will invest at least an additional $30 million,
pursuant to the terms of the Equity Purchase Agreement, and may make a further
investment, if required to do so, in accordance with the terms of the Support
Agreement. The Company expects that it will report additional losses related to
CBHS prior to the close of the transactions referenced in the Equity Purchase
Agreement and the Purchase Agreement.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Equipment Sales and Leasing
Revenues increased approximately $1.2 million, or 13.6%, to $10.4
million for the year ended December 31, 1996, compared with $9.1 million for the
year ended December 31, 1995. The increase is primarily the result of an
increase in customer construction projects and a corresponding increase in
demand for Moody-Day's equipment and services, an increase in the amount of
equipment Moody-Day had available to meet sale and rental demand and the
favorable introduction by Moody-Day of new lines of equipment available for sale
and rental. Total equipment sales and leasing cost of sales increased
approximately $1.2 million, or 13.5%, to $10.3 million for the year ended
December 31, 1996, compared with $9.1 million for the year ended December 31,
1995. This increase is due primarily to an increase in depreciation expense as a
result of inventory purchased by Moody-Day to meet customer demand for rental
equipment, an increase in cost of sales as a result of the new equipment lines
available for sale and an increase in sales commissions.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has pending acquisitions and future opportunities
for which it does not yet have adequate financing, including transactions
involving CBHS, Central Texas Equipment Co., Station Casinos, Inc., Hicks-Muse
and the Mavericks/Stars arena and adjacent development opportunities. Management
is considering an equity offering (as discussed below), various financing
alternatives with Crescent Equities and Crescent Partnership, and additional
bank financing. Crescent Operating anticipates that it will obtain adequate
financing to capitalize on pending and identified future business and investment
opportunities, although there can be no assurances that adequate financing will
be obtained at a cost of capital acceptable to the Company.
Net cash flows provided by operating activities for the year ended
December 31, 1997 were $24.0 million compared with the net cash provided by
operating activities of $.5 million and $29,321 for the years ended December 31,
1996 and 1995, respectively. Significant components of the $24.0 million of cash
provided by operating activities for the year ended December 31, 1997 were $17.0
million of equity in loss of unconsolidated subsidiaries, $4.1 million of
depreciation expense, an increase in deferred revenue of $10.1 million, an
increase in accounts payable and accrued expenses of $14.8 million and the
current year loss of $22.1 million.
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<PAGE> 27
Net cash flows used in investing activities for the year ended December
31, 1997 were $45.1 million compared with the net cash used in investing
activities of $3.1 million and $1.9 million for the years ended December 31,
1996 and 1995, respectively. Significant components of the $45.1 million of cash
used in investing activities for the year ended December 31, 1997 were $63.8
million for the purchase of investments, $15.0 million for the purchase of
property and equipment, cash received from the sale of real estate of $21.6
million and $12.5 million of cash received from the sale of the DBL Interest.
Net cash flows provided by financing activities for the year ended
December 31, 1997 were $64.7 million compared with the net cash provided by
financing activities of $2.3 million and $1.8 million for the years ended
December 31, 1996 and 1995, respectively. Significant components of the $64.7
million of cash provided by financing activities for the year ended December 31,
1997 were $87.5 million of proceeds from the issuance of long term debt, $20.1
million of capital contributions and $40.6 million of cash used to make payments
on long term debt obligations.
In connection with the formation and capitalization of Crescent
Operating, Crescent Operating received approximately $14.1 million in cash from
Crescent Partnership and Crescent Partnership loaned Crescent Operating
approximately $35.9 million pursuant to a five-year term loan, maturing on May
8, 2002, of which approximately $26.0 million was outstanding as of December 31,
1997. The loan is a recourse loan that is collateralized, to the extent not
prohibited by pre-existing arrangements, by a first lien on the assets owned by
Crescent Operating as of June 30, 1997. The loan bears interest at the rate of
12% per annum, compounded annually, and is payable quarterly in an amount equal
to the lesser of (i) the net cash flow for the preceding quarter and (ii) the
quarterly amount of principal due, together with interest accrued on the loan.
Net cash flow is computed by subtracting the total costs incurred by Crescent
Operating from its gross receipts. The Company also obtained a $20.4 million
line of credit from Crescent Partnership in connection with its formation and
capitalization. Advances under the line of credit bear interest at the same rate
as the term loan. The line of credit is payable on an interest-only basis during
its term, which expires on the later of (i) May 31, 2002 or (ii) five years
after the last draw under the line of credit. Draws may be made under the line
of credit until June 22, 2002. The line of credit is a recourse obligation and
amounts outstanding thereunder are collateralized, to the extent not prohibited
by pre-existing arrangements, by a first lien on the assets owned by Crescent
Operating as of June 30, 1997. As of December 31, 1997, $13.7 million was
outstanding under the line of credit.
Approximately $12.6 million in cash and the proceeds of approximately
$15.3 million of loans were used to acquire the Carter-Crowley Assets and the
12.38% DBL Interest. The remaining approximately $1.5 million previously funded
in the form of cash, together with the remaining approximately $20.6 million
advanced in the form of loans, were used both to acquire, and make an additional
contribution relating to, the CBHS Interest and to acquire the Magellan warrants
for an aggregate of approximately $20.0 million, and to fund an obligation of
Moody-Day to purchase construction equipment for approximately $2.1 million. The
line of credit was used to support funding obligations associated with these
acquisitions (consisting of approximately $2.1 million relating to Crescent
Operating's investment in Hicks-Muse and approximately $17.5 million relating to
the CBHS Interest) and other cash requirements.
In August 1997, the Company obtained a $15.0 million short-term
unsecured bank line of credit from NationsBank. The line of credit has a
one-year term (subject to the Company's right to renew the term for an
additional one-year period) and bears interest at the LIBOR rate plus 1%. The
$15.0 million available under the line of credit from NationsBank was fully
drawn as of December 31, 1997, and was used to acquire RoseStar and reduce the
outstanding balance of the line of credit with Crescent Partnership.
The primary source of repayment of the NationsBank line of credit is
anticipated to be a future equity offering, which the Company has agreed to use
its best efforts to complete prior to maturity of the loan in August 1998 or
1999. The Company has obtained an agreement from Richard Rainwater, Gerald
Haddock and John Goff (each a stockholder, director and/or officer of the
Company) which provides that, if the Company does not raise from an equity
offering funds sufficient to pay the NationsBank line of credit when due (a
"Successful Offering"), each of Messrs. Rainwater, Haddock and Goff jointly and
severally agree to purchase the number of additional shares of the Company's
Common Stock necessary to fund repayment of the NationsBank line of credit. The
Company has agreed to sell such additional shares of common stock to Messrs.
Rainwater, Haddock, and Goff at a
27
<PAGE> 28
price equal to the average closing bid price of the Company's common stock
during the 10 days immediately preceding the date NationsBank notifies Messrs.
Rainwater, Haddock and Goff that the Company has not completed a Successful
Offering prior to maturity of the NationsBank line of credit.
As a part of the acquisition of a two-thirds interest in the HCAC and
the related $5.0 million note, the Company borrowed $1.8 million in the form of
two notes (one for $1.0 million and the other for $.8 million) from Crescent
Partnership at the interest rate of 8.5% per annum. The $1.0 million note, which
is secured by the $5.0 million note the Company purchased as part of the
transaction, matures on September 21, 1998, with interest, which commenced in
October 1997, payable monthly. The $.8 million note is collateralized by the
two-thirds interest in the HCAC and matures September 22, 2002. An interest-only
payment became due in October 1997. Monthly principal and interest payments on
the $.8 million loan commenced in November 1997.
Desert Mountain Development has entered into a $7.6 million revolving
credit agreement with Crescent Partnership which bears interest at the rate of
10% per annum on amounts outstanding under the line of credit. The agreement
expires in March of 1998, at which time the outstanding principal balance and
accrued interest becomes due. As of December 31, 1997, no amount was outstanding
under this revolving credit agreement. In connection with this agreement, Desert
Mountain Properties has entered into an $8.0 million revolving credit agreement
with Desert Mountain Development which bears interest at an annual rate equal to
prime rate plus 1% on amounts outstanding thereunder. This agreement expires in
March of 1998 at which time the outstanding principal balance and accrued
interest becomes due. As of December 31, 1997, no amount was outstanding under
this revolving credit agreement.
Desert Mountain Properties also has a credit agreement with Crescent
Partnership pursuant to which Crescent Partnership has advanced funds to Desert
Mountain Properties through a "Junior Note", a "Senior Note" and a "Lot Sales
Note". The Junior Note evidences a $60.0 million advance from Crescent
Partnership to Desert Mountain Properties and accrues interest at 14% per annum.
The Senior Note evidences a $110.0 million advance from Crescent Partnership to
Desert Mountain Properties and accrues interest at 10% per annum. The principal
and interest on both the Junior Note and the Senior Note are payable in
quarterly installments, based on proceeds from the operations of Desert Mountain
Properties. The Lot Sales Note bears interest at an annual rate equal to the
prime rate plus 1%, and is payable in monthly installments based on the previous
month's proceeds obtained by Desert Mountain Properties from other land note
receivables. As of December 31, 1997, the outstanding balance on the Lot Sales
Note was $17.6 million.
Moody-Day has various equipment notes payable to finance companies which
are collateralized by the equipment financed. The notes are payable in monthly
principal and interest payments and bear interest at 8.5% to 10% per annum.
These notes mature between 1998 and 2003. As of December 31, 1997, the
outstanding balance on these equipment notes was $11.2 million.
MODIFICATION OF COMPUTER SOFTWARE FOR THE YEAR 2000
The Company is currently evaluating its equipment for use in the Year
2000. Work plans detailing the tasks and resources required to insure that
equipment is Year 2000 compliant are currently being developed and in many cases
are already being implemented or Year 2000 compliant systems have been
installed. CBHS expects to spend $1 million in the aggregate during fiscal 1998
and fiscal 1999 to modify internal use software. The Company does not anticipate
incurring any other significant costs to make equipment Year 2000 compliant.
Costs associated with modifying equipment to be Year 2000 compliant are charged
to expense as incurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This Item is inapplicable to Crescent Operating because its market
capitalization was less than $2.5 billion on January 28, 1997.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is contained in the Company's Consolidated
Financial Statements and financial statement schedule indicated in the Index on
Page F-1 of this Annual Report on Form 10-K and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 15, 1998, Crescent Operating dismissed Arthur Andersen LLP
("Arthur Andersen") as its principal independent accountants. The decision to
change accountants was recommended by the Executive Committee of the Board of
Directors of Crescent Operating and was approved by the Audit Committee of the
Board of Directors. The Audit Committee of the Board of Directors consists of
two independent directors. The reports of Arthur Andersen on the financial
statements of the Carter-Crowley Asset Group ("Predecessor"), for the fiscal
years ended December 31, 1996 and December 31, 1995, and the initial balance
sheet of Crescent Operating, as of April 3, 1997, did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During the two most recent
fiscal years and the interim period from January 1, 1998 through January 15,
1998, there were no disagreements between the Company (including the
Predecessor) and Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. There
were no "reportable events" (as defined in Item 304(a)(1)(v) of Regulation S-K)
with respect to the Company within the past two fiscal years and the interim
period from January 1, 1998 through January 15, 1998.
On January 15, 1998, Crescent Operating engaged Ernst & Young LLP
("E&Y") as its new independent accountants to serve as the principal accountants
to audit the Company's financial statements.
During the two most recent fiscal years and the interim period from
January 1, 1998 through January 15, 1998, the Company (including the
Predecessor) did not consult E&Y regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements;
or (ii) any matter that was either the subject of a disagreement (as defined in
Item 304(a)(l)(iv) of Regulation S-K) or a reportable event (as defined in Item
304(a)(l)(v) of Regulation S-K).
PART III
Certain information required by Part III is omitted from this report in
that the Company will file a definitive proxy statement with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A ("Proxy
Statement") not later than 120 days after the end of the fiscal year covered by
this report, and certain information to be included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1998.
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<PAGE> 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission for its annual
shareholders' meeting to be held in June 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of the Report:
1. Financial Statements
Information with respect to this Item is contained on pages F-1 to
F-38 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
Information with respect to this Item is listed on page F-1 and is
contained on pages S-1 to S-5 of this Annual Report on Form 10-K.
3. Exhibits
Exhibit
Number Description of Exhibits
------ -----------------------
3.1* First Amended and Restated Certificate of Incorporation
3.2* First Amended and Restated Bylaws
4.1* Specimen stock certificate
4.2* Preferred Share Purchase Rights Plan
10.1* Amended Stock Incentive Plan
10.2 Intercompany Agreement between Crescent Operating Inc. and
Crescent Real Estate Equities Limited Partnership (filed as
Exhibit 10.2 to the Quarterly report on Form 10-Q for the
Quarter Ended June 30, 1997 of Crescent Operating, Inc. and
incorporated herein by reference)
10.3 Amended and Restated Operating Agreement of Charger Behavioral
Health Systems, L.L.C. (filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Crescent Operating, Inc. for the
Quarter Ended June 30, 1997 and incorporated herein by
reference)
10.5** Amended and Restated Credit and Security Agreement, dated as
of May 30, 1997, between Crescent Real Estate Equities Limited
Partnership and Crescent Operating, Inc., together with related
Note
10.6** Line of Credit and Security Agreement, dated as of May 21,
1997, between Crescent Real Estate Equities Limited
Partnership and Crescent Operating, Inc., together with
related Line of Credit Note
10.7* Acquisition Agreement, dated as of February 10, 1997, between
Crescent Real Estate Equities Limited Partnership and
Carter-Crowley Properties, Inc.
10.10** Security Agreement dated September 22, 1997 between COI Hotel
Group, Inc., as debtor, and Crescent Real Estate Equities
Limited Partnership, as lender, together with related $1
million promissory note
10.11** Security Agreement dated September 22, 1997 between COI Hotel
Group, Inc., as debtor, and Crescent Real Estate Equities
Limited Partnership, as lender, together with related $800,000
promissory note
10.12** Amended and Restated Asset Management dated August 31, 1997,
to be effective July 31, 1997, between Wine Country Hotel, LLC
and The Varma Group, Inc.
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<PAGE> 31
10.13** Amended and Restated Asset Management Agreement dated August
31, 1997, to be effective July 31, 1997, between RoseStar
Southwest, LLC and The Varma Group, Inc.
10.14** Amended and Restated Asset Management Agreement dated August
31, 1997, to be effective July 31, 1997, between RoseStar
Management LLC and The Varma Group, Inc.
10.15** Agreement for Financial Services dated July 1, 1997, between
Crescent Real Estate Equities Company and Petroleum Financial,
Inc.
10.16** Credit Agreement dated August 27, 1997, between Crescent
Operating, Inc. and NationsBank of Texas, N.A. together with
related $15.0 million promissory note
10.17** Support Agreement dated August 27, 1997, between Richard E.
Rainwater, John Goff and Gerald Haddock in favor of Crescent
Real Estate Equities Company and NationsBank of Texas, N.A.
10.18 1997 Crescent Operating, Inc. Management Stock Incentive Plan
(filed herewith)
10.19 Memorandum of Agreement executed November 16, 1997, among
Charter Behavioral Health Systems, LLC, charter Behavioral
Health Systems, Inc. and Crescent Operating, Inc.
10.20 Purchase Agreement dated August 31, 1997, by and among Crescent
Operating, Inc. Rose Star Management LLC, Gerald W. Haddock,
John C. Goff and Sanjay Varma.
10.21 Stock Purchase Agreement dated August 31, 1997, by and among
Crescent Operating, Inc., Gerald W. Haddock, John C. Goff and
Sanjay Varma.
10.22 Amended and Restated Lease Agreement, dated June 30, 1995
between Crescent Real Estate Equities Limited Partnership and
RoseStar Management L.L.C., relating to the Denver Marriott
City Center (filed as Exhibit 10.17 to the Annual Report on
Form 10-K of Crescent Real Estate Equities Company for the
Fiscal Year Ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference)
10.23 Lease Agreement, dated December 19, 1995 between Crescent Real
Estate Equities Limited Partnership and RoseStar Management
L.L.C., relating to the Hyatt Regency Albuquerque (filed as
Exhibit 10.16 to the 1995 10-K and incorporated herein by
reference)
10.24 Form of Amended and Restated Lease Agreement, dated January 1,
1996, among Crescent Real Estate Equities Limited Partnership,
Mogul Management, L.L.C. and RoseStar Management L.L.C.,
relating to the Hyatt Regency Beaver Creek (filed as Exhibit
10.12 to the 1995 10-K and incorporated herein by reference)
10.25 Lease Agreement, dated July 26, 1996, between Canyon Ranch,
Inc. and Canyon Ranch Leasing, L.L.C., assigned by Canyon
Ranch, Inc. to Crescent Real Estate Equities Limited
Partnership pursuant to the Assignment and Assumption Agreement
of Master Lease, dated July 26, 1996 (filed as Exhibit 10.24
to the Quarterly Report on Form 10-Q/A of Crescent Real Estate
Equities Company for the Quarter Ended June 30, 1997 (the
"1997 10-Q") and incorporated herein by reference)
10.26 Lease Agreement, dated November 18, 1996, between Crescent
Real Estate Equities Limited Partnership and Win Country
Hotel, LLC (filed as Exhibit 10.25 to the Annual Report on
Form 10-K of Crescent Real Estate Equities Company for the
Fiscal Year Ended December 31, 1996 and incorporated herein by
reference)
10.27 Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P. and Vintage Resorts,
L.L.C., as assigned by Canyon Ranch-Bellefontaine Associates,
L.P. to Crescent Real Estate Funding VI, L.P. pursuant to the
Assignment and Assumption Agreement of Master Lease, dated
December 11, 1996 (filed as Exhibit 10.26 to the 1997 10-Q and
incorporated herein by reference)
10.28 Master Lease Agreement, dated June 16, 1997, between Crescent
Real Estate Funding VII, L.P. and Charger Behavioral Health
Systems, L.L.C. and its subsidiaries, relating to the
Facilities (filed as Exhibit 10.27 to the 1997 10-Q and
incorporated herein by reference)
10.29 Form of Indemnification Agreement.
10.30 Purchase Agreement, dated as of September 29, 1997, between
Crescent Operating, Inc. and Crescent Real Estate Equities
Limited Partnership, relating to the purchase of Desert
Mountain Development Corporation (filed herewith)
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<PAGE> 32
16 Letter of Arthur Andersen LLP regarding disclosure in
connection with change in certifying accountant (incorporated
by reference to the Company's current report on Form 8-K, dated
January 15, 1998)
21 List of Subsidiaries of Crescent Operating, Inc.
27 Financial Data Schedule
* Incorporated by Reference to the Company's registration
statement on Form S-1 dated July 12, 1997.
** Incorporated by Reference to the Company's September 30, 1997
Form 10-Q.
(b) Reports on Form 8-K:
Form 8-K/A filed on October 14, 1997 to the Form 8-K dated July
31, 1997 and filed on August 14, 1997, reflecting the Company's
acquisition of an interest in LandCo and including the financial
statements and pro forma disclosure required by Item 7 of Form 8-K.
Form 8-K dated September 29, 1997 and filed on October 14, 1997,
describing the acquisition of the Company's interest in Desert Mountain
Development.
Form 8-K/A filed on November 14, 1997, to the Form 8-K dated
August 31, 1997 and filed on September 15, 1997, including the financial
statements and pro forma disclosure required by Item 7 of Form 8-K.
Form 8-K/A filed on November 25, 1997, to the Form 8-K dated
September 29, 1997, and filed on October 14, 1997, updating certain
information regarding the Company's acquisition of an interest in Desert
Mountain Development.
(c) Exhibits Required by Item 601 of Regulation S-K:
Exhibits required are listed under Item 14(a)(3).
(d) Financial Statement Schedules Required by Regulation S-X:
Information with respect to this Item is contained on Pages F-1 to F-38
of this Annual Report on Form 10-K.
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<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1998.
CRESCENT OPERATING, INC.
(Registrant)
By /s/ Gerald W. Haddock
--------------------------------------
Gerald W. Haddock
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/
- -----------------------------
Richard E. Rainwater Chairman of the Board of Directors March 31, 1998
/s/ John C. Goff
- -----------------------------
John C. Goff Vice Chairman of the Board of Directors March 31, 1998
/s/ Gerald W. Haddock
- -----------------------------
Gerald W. Haddock President and Chief Executive Officer
and Director (Principal Executive Officer) March 31, 1998
/s/ Jeffrey L. Stevens
- -----------------------------
Jeffrey L. Stevens Executive Vice President, Chief Operating
Officer and Director March 31, 1998
/s/ Richard P. Knight
- -----------------------------
Richard P. Knight Chief Financial Officer
(Principal Financial and Accounting Officer) March 31, 1998
/s/
- -----------------------------
Anthony M. Frank Director March 31, 1998
/s/
- -----------------------------
Carl F. Thorne Director March 31, 1998
/s/ Paul E. Rowsey, III
- -----------------------------
Paul E. Rowsey, III Director March 31, 1998
</TABLE>
<PAGE> 34
CRESCENT OPERATING, INC.
INDEX TO FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant and
its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)1:
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC. PAGE
----
<S> <C>
Reports of Independent Auditors ........................................................ F-2
Consolidated Balance Sheets............................................................. F-5
Consolidated Statements of Operations................................................... F-6
Consolidated Statements of Changes in Shareholders' Equity (Deficit).................... F-7
Consolidated Statements of Cash Flows................................................... F-8
Notes to Consolidated Financial Statements.............................................. F-9
The following financial statement schedule of the Registrant and its
subsidiaries is submitted herewith in response to Item 14(a)2:
Schedule I - Condensed Financial Information of Registrant.............................. S-1
All other schedules have been omitted since the required information is presented in
the financial statements and the related notes or is not applicable.
The following Consolidated Financial Statements are submitted herewith
in response to Rule 3-09 of Regulation S-X:
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
Report of Independent Public Accountants................................................ F-27
Consolidated Balance Sheet as of September 30, 1997..................................... F-28
Consolidated Statement of Operations for the 106 days ended September 30, 1997.......... F-30
Consolidated Statement of Changes in Members' Capital for the 106 days
ended September 30, 1997.............................................................. F-31
Consolidated Statement of Cash Flows for the 106 days ended September 30, 1997.......... F-32
Notes to Consolidated Financial Statements.............................................. F-33
The following financial statement schedule for Charter Behavioral
Health Systems, LLC and its subsidiaries is submitted herewith in response
to Item 14(a)2:
Schedule II - Valuation and Qualifying Accounts - CBHS.................................. S-5
All other schedules have been omitted since the required information is presented in
the financial statements and the related notes or is not applicable.
</TABLE>
F-1
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Crescent Operating, Inc.
We have audited the accompanying consolidated balance sheet of Crescent
Operating, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for the period from May 9, 1997 through December 31,
1997. Our audit also included the accompanying financial statement Schedule I,
Condensed Financial Information of Registrant. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Crescent Operating, Inc. and subsidiaries at December 31, 1997, and the
consolidated results of their operations and their cash flows for the period
from May 9, 1997 through December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
March 27, 1998
F-2
<PAGE> 36
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Crescent Operating, Inc.
We have audited the accompanying combined statements of operations,
changes in shareholder's equity, and cash flows for the period from January 1,
1997 through May 8, 1997 of Carter-Crowley Asset Group as described in Note 2.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined results of operations, changes
in shareholder's equity and cash flows for the period from January 1, 1997
through May 8, 1997 of Carter-Crowley Asset Group in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 2, 1998
F-3
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Carter-Crowley Properties, Inc.
We have audited the accompanying combined balance sheet of Carter-Crowley
Asset Group as described in Note 2, as of December 31, 1996, and the related
combined statements of operations, shareholder's equity and cash flows for each
of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of Carter-Crowley Asset Group's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Carter-Crowley Asset Group
as of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 14, 1997
F-4
<PAGE> 38
CRESCENT OPERATING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Carter-Crowley
Crescent Asset Group
Operating, Inc. (Predecessor)
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 43,401,132 $ 22,335
Accounts receivable, net of allowance for doubtful accounts of
$35,972 and $30,645 in 1997 and 1996, respectively 17,099,165 1,202,585
Inventories 10,125,075 1,612,952
Notes receivable 8,454,059 --
Real estate 43,200,000 --
Prepaid expenses and other current assets 4,714,827 249,189
----------------- -----------------
Total current assets 126,994,258 3,087,061
----------------- -----------------
PROPERTY AND EQUIPMENT, NET 90,979,033 6,683,458
----------------- -----------------
INVESTMENTS 219,675,214 7,593,493
----------------- -----------------
OTHER ASSETS
Real estate 70,827,584 --
Notes receivable 35,343,319 --
Goodwill, net of accumulated amortization of $83,015 in 1997 35,777,368 --
Other assets 6,380,300 118,721
----------------- -----------------
Total other assets 148,328,571 118,721
----------------- -----------------
TOTAL ASSETS $ 585,977,076 $ 17,482,733
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 49,320,732 $ 782,567
Accounts payable - CEI 6,682,751 --
Current portion of long-term debt - CEI 24,084,587 --
Current portion of long-term debt 18,759,349 2,205,742
Deferred revenue 4,712,227 --
----------------- -----------------
Total current liabilities 103,559,646 2,988,309
LONG-TERM DEBT-CEI, NET OF CURRENT PORTION 207,798,563 --
LONG-TERM DEBT, NET OF CURRENT PORTION 7,486,378 3,199,607
OTHER LIABILITIES 21,626,051 369,806
----------------- -----------------
Total liabilities 340,470,638 6,557,722
----------------- -----------------
MINORITY INTERESTS 253,566,622 --
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 12)
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $.01 par value, 22,500,000 shares authorized,
11,211,094 shares issued and outstanding 112,111 12 500
Additional paid-in capital 14,255,423 14,550,221
Deferred compensation on restricted shares (262,500) --
Retained deficit (22,165,218) (3,637,710)
----------------- -----------------
Total shareholders' equity (deficit) (8,060,184) 10,925,011
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 585,977,076 $ 17,482,733
================= =================
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 39
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Crescent Operating, Inc. Carter-Crowley Asset Group (Predecessor)
------------------------ -------------------------------------------------------------
For the Period from For the Period from For the For the
May 9, 1997 to January 1, 1997 to Year Ended Year Ended
December 31, 1997 May 8, 1997 December 31, 1996 December 31, 1995
------------------------ ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Equipment sales & leasing $ 10,517,817 $ 4,657,260 $ 10,393,683 $ 9,147,242
Hospitality 79,467,764 -- -- --
Land development 66,896,540 -- -- --
------------------------ ------------------- ----------------- -----------------
Total revenues 156,882,121 4,657,260 10,393,683 9,147,242
------------------------ ------------------- ----------------- -----------------
OPERATING EXPENSES
Equipment sales & leasing 9,782,834 4,499,145 10,284,710 9,057,849
Hospitality direct expenses 62,541,886 -- -- --
Hospitality properties rent - CEI 16,694,376 -- -- --
Land development direct expenses 67,095,042 -- -- --
General and administrative expenses 1,760,609 -- -- --
------------------------ ------------------- ----------------- -----------------
Total operating expenses 157,874,747 4,499,145 10,284,710 9,057,849
------------------------ ------------------- ----------------- -----------------
INCOME (LOSS) FROM OPERATIONS (992,626) 158,115 108,973 89,393
------------------------ ------------------- ----------------- -----------------
INVESTMENT (INCOME) LOSS 16,422,678 -- -- --
------------------------ ------------------- ----------------- -----------------
OTHER (INCOME) EXPENSE
Interest expense 5,480,743 135,367 356,517 152,631
Interest income (1,751,041) (12,885) (51,881) (50,394)
Other (158,506) (3,459) (27,202) (136,783)
------------------------ ------------------- ----------------- -----------------
Total other (income) expense 3,571,196 119,023 277,434 (34,546)
------------------------ ------------------- ----------------- -----------------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES (20,986,500) 39,092 (168,461) 123,939
MINORITY INTERESTS (566,077) -- -- --
------------------------ ------------------- ----------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES (21,552,577) 39,092 (168,461) 123,939
INCOME TAX (PROVISION) BENEFIT (612,641) (13,682) 57,677 (44,783)
------------------------ ------------------- ----------------- -----------------
NET INCOME (LOSS) $ (22,165,218) $ 25,410 $ (110,784) $ 79,156
======================== =================== ================= =================
NET LOSS PER SHARE -
BASIC AND DILUTED $ (2.00)
========================
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 11,072,849
========================
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 40
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deferred
Common Stock Compensation
--------------------- Additional on Restricted Retained
Shares Amount Paid-in Capital Shares Deficit Total
---------- -------- --------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1994, (Predecessor) 12,500 $ 12,500 $ 6,931,879 $ -- $ (3,606,082) $ 3,338,297
Contributed capital -- -- 6,353,215 -- -- 6,353,215
Distributions -- -- (412,617) -- -- (412,617)
Net income -- -- -- -- 79,156 79,156
---------- -------- --------------- ------------- ------------ -----------
BALANCE at December 31, 1995, (Predecessor) 12,500 12,500 12,872,477 -- (3,526,926) 9,358,051
Contributed capital -- -- 3,355,290 -- -- 3,355,290
Distributions -- -- (1,677,546) -- -- (1,677,546)
Net loss -- -- -- -- (110,784) (110,784)
---------- -------- --------------- ------------- ------------ -----------
BALANCE at December 31, 1996, (Predecessor) 12,500 12,500 14,550,221 -- (3,637,710) 10,925,011
Contributed capital -- -- 6,023,013 -- -- 6,023,013
Net income -- -- -- -- 25,410 25,410
---------- -------- --------------- ------------- ------------ -----------
BALANCE at May 8, 1997, (Predecessor) 12,500 12,500 20,573,234 -- (3,612,300) 16,973,434
Formation transactions:
Elimination of Predecessor's equity (12,500) (12,500) (20,573,234) -- 3,612,300 (16,973,434)
Contributed capital from CEI -- -- 14,100,000 -- -- 14,100,000
Cash dividends -- -- (2,380,000) -- -- (2,380,000)
Common stock issuance 11,025,605 110,256 (110,256) -- -- --
Stock options exercised 45,489 455 44,579 -- -- 45,034
Common stock issued for Preco acquisition 130,000 1,300 2,338,700 -- -- 2,340,000
Issuance of restricted common stock 10,000 100 262,400 (262,500) -- --
Net loss -- -- -- -- (22,165,218) (22,165,218)
---------- -------- --------------- ------------- ------------ -----------
BALANCE at December 31, 1997 11,211,094 $112,111 $ 14,255,423 $ (262,500) $(22,165,218) $(8,060,184)
========== ======== =============== ============= ============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-7
<PAGE> 41
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Crescent
Operating, Inc. Carter-Crowley Asset Group (Predecessor)
------------------- -----------------------------------------------------------
For the Period from For the Period from For the For the
May 9, 1997 to January 1, 1997 to Year Ended Year Ended
December 31, 1997 May 8, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (22,165,218) $ 25,410 $ (110,784) $ 79,156
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation 3,575,671 493,778 1,367,579 1,166,102
Amortization 83,015 -- -- --
Provision for deferred income taxes 522,708 13,682 151,178 29,421
Equity in loss of unconsolidated subsidiaries 17,011,361 -- -- --
Minority interests 566,077 -- -- --
Gain on sale of partnership (110,252) -- -- --
Gain on sale of property and equipment (161,270) -- (103,968) (443,735)
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable (2,219,266) 22,439 (155,909) (741,731)
Inventories (1,334,320) (562,570) (876,928) (110,770)
Prepaid expenses and current assets (3,507,976) (46,807) (2,102) 24,646
Accounts payable and accrued expenses 14,671,069 129,019 242,044 26,232
Accounts payable - CEI 3,979,722 211,766 -- --
Deferred revenue, current and noncurrent 10,050,514 -- -- --
Other liabilities 2,819,384 (104,824) -- --
------------------- ------------------- ----------------- -----------------
Cash provided by operating activities 23,781,219 181,893 511,110 29,321
------------------- ------------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (13,951,237) (1,067,185) (4,375,793) (2,634,559)
Proceeds from sale of partnership 12,550,000 -- -- --
Proceeds from sale of property and equipment 1,022,144 -- 981,777 1,343,032
Proceeds from sale of real estate 21,629,718 -- -- --
Cash paid for investments, net of cash received (63,758,983) -- -- --
Other (1,669,517) 145,360 268,011 (599,052)
------------------- ------------------- ----------------- -----------------
Cash used in investing activities (44,177,875) (921,825) (3,126,005) (1,890,579)
------------------- ------------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt 22,461,790 -- 4,885,240 3,288,642
Proceeds from long-term debt - CEI 65,057,515 -- -- --
Payments on long-term debt (919,971) (5,139,731) (2,600,587) (1,492,969)
Payments on long-term debt - CEI (34,567,580) -- -- --
Capital contributions received 14,100,000 6,023,013 -- --
Dividends paid (2,380,000) -- -- --
Cash received on stock options exercised 45,034 -- -- --
------------------- ------------------- ----------------- -----------------
Cash provided by financing activities 63,796,788 883,282 2,284,653 1,795,673
------------------- ------------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 43,400,132 143,350 (330,242) (65,585)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,000 22,335 352,577 418,162
------------------- ------------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 43,401,132 $ 165,685 $ 22,335 $ 352,577
=================== =================== ================= =================
</TABLE>
See accompanying notes to the consolidated financial statements.
F-8
<PAGE> 42
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
Crescent Operating, Inc. ("Crescent Operating", "COI" or the "Company")
was formed on April 1, 1997, by Crescent Real Estate Equities Company
("Crescent Equities" or "CEI") and its subsidiary Crescent Real Estate
Equities Limited Partnership ("Crescent Partnership") to be the lessee and
operator of certain assets to be acquired by Crescent Partnership and perform
an agreement ("Intercompany Agreement") between Crescent Operating and
Crescent Partnership, pursuant to which each has agreed to provide the other
with rights to participate in certain transactions. On May 8, 1997, Crescent
Partnership contributed $14.1 million in cash to Crescent Operating.
Effective June 12, 1997, Crescent Equities distributed shares of Crescent
Operating common stock to shareholders of Crescent Equities and unit holders
of Crescent Partnership of record on May 30, 1997. For Crescent Equities
shareholders, the distribution was made on the basis of one share of Crescent
Operating common stock for every 10 common shares of beneficial interest of
Crescent Equities held on the record date, and for limited partners of
Crescent Partnership, the distribution was made on the basis of one share of
Crescent Operating common stock for every 5 units of limited partnership
interest held on the record date.
On June 12, 1997, Crescent Operating's registration statement was declared
effective and Crescent Operating became a public company. Crescent Operating
common stock was accepted for quotation on the OTC Bulletin Board and began
trading on a when-issued basis on June 13, 1997. On September 8, 1997, the
Company was listed on the NASDAQ National Market under the symbol "COPI".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Crescent Operating
include the accounts of the Company and all subsidiaries controlled by the
Company after elimination of material intercompany accounts and transactions.
Subsidiaries not controlled by the Company, but for which the Company has the
ability to exercise significant influence, are accounted for on the equity
method.
Moody-Day, Inc. ("Moody-Day"), Rosestar Management LLC ("Rosestar"), COI
Hotel Group, Inc. ("COI Hotel"), and WOCOI Investment Company ("WOCOI"),
which are wholly-owned subsidiaries of Crescent Operating, are consolidated.
The Company owns 5% of the Woodlands Land Company, Inc. ("LandCo"), Desert
Mountain Development Corporation ("Desert Mountain Development"), Crescent CS
Holdings Corporation ("CS I") and Crescent CS Holdings II Corporation ("CS
II"). The Company's 5% interests represent 100% of the voting stock of these
entities, and therefore, these entities are consolidated into Crescent
Operating and the remaining 95% is reported as minority interests. The
Company's investment in Hicks Muse Tate & Furst Equity Fund II, L.P.
("Hicks-Muse") is shown at cost and the 50% interest in Charter Behavioral
Health Systems, LLC ("CBHS") is shown on the equity method of accounting.
The combined financial statements of the "Predecessor" were prepared on
the basis that the Predecessor is a combination of Moody-Day and Hicks-Muse
(collectively, the "Carter-Crowley Asset Group"). As the Company did not have
any activity prior to May 9, 1997, the data included relating to 1995, 1996
and the period in 1997 prior to May 9, is only with regard to the
Predecessor. The assets of Carter-Crowley Asset Group were adjusted at May 9,
1997 to reflect the purchase price allocation.
USE OF ESTIMATES
The financial statements include estimates and assumptions made by
management that affect the carrying amounts of assets and liabilities,
reported amounts of revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results may differ from these estimates.
F-9
<PAGE> 43
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. Cash of $26.7 million resides
with a subsidiary and restrictions limit transfers to the parent company.
INVENTORIES
Inventories consist of new equipment held for sale, construction
accessories, equipment parts, food, beverages and supplies all of which are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
PROPERTY AND EQUIPMENT
The Company uses the straight-line method of depreciation for financial
statement purposes. The estimated useful lives used in computing depreciation
are as follows:
<TABLE>
<S> <C>
Land improvements............................. 10-15 years
Rental equipment.............................. 2-7 years
Building and improvements..................... 30 years
Transportation equipment...................... 3-5 years
Furniture, fixtures, and other equipment...... 5-10 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures for renewals or betterment's are capitalized. The cost
of property replaced, retired, or otherwise disposed of is removed from the
asset account along with the related accumulated depreciation. Gains or
losses on the disposal of property and equipment are recorded in the year of
disposal.
Long-lived assets are evaluated when indications of impairment are
present, and provisions for possible losses are recorded when undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying value. The Company did not recognize any losses from
impairment during the period ended December 31, 1997.
REAL ESTATE
Real estate represents raw land, developed land, homes constructed or
under construction, repurchased lots, applicable capitalized interest, and
applicable capitalized general and administrative costs. Real estate is
recorded at cost.
Interest is capitalized based on the average yearly interest percentage
applied to cumulative capital expenditures for property under development.
Approximately $5.2 million of interest was capitalized for the period ended
December 31, 1997. Payroll and related costs associated with the development
of a specific subdivision of land are capitalized. Once sales of property
begin in a specific subdivision, capitalized costs are expensed as cost of
sales.
GOODWILL
Goodwill represents the excess of the acquisition costs over the fair
value of net identifiable assets of businesses acquired and is amortized on a
straight-line basis over 9-12 years. Goodwill is evaluated periodically as
events or circumstances indicate a possible inability to recover its carrying
amount. Such evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing company operations. The analyses involve significant management
judgment to evaluate the capacity of an acquired operation to perform within
projections. Management believes that no significant impairment of goodwill
and other intangible assets has occurred.
F-10
<PAGE> 44
DEFERRED COMPENSATION ON RESTRICTED SHARES
Deferred compensation on restricted shares relates to restricted shares
issued to employees which are being amortized to expense over the vesting
period of the respective shares issued.
REVENUE RECOGNITION
Revenues from equipment rentals under operating leases are recognized as
the revenue becomes receivable according to the provisions of the lease.
Revenues from equipment rentals under sales-type lease agreements are
recognized over the life of the contract. Revenues from full-service hotels,
and luxury health resorts are recognized as earned. Club initiation fees and
membership conversion fees at Desert Mountain Development are deferred and
recognized on a straight-line basis over the expected life of the membership.
Deposits for future services are deferred and recognized as revenue in the
period services are provided.
MINORITY INTERESTS
Minority interest represents the nonvoting common stock interests owned by
shareholders in LandCo., Desert Mountain Development, CS I and CS II.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the treatment of certain items
for financial statement purposes and the treatment of those items for
corporation tax purposes. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled.
RECLASSIFICATIONS
Certain Predecessor information has been reclassified to conform to
current year presentation.
STOCK BASED COMPENSATION
The Company measures compensation costs associated with the issue of share
options using the guidance provided by the Accounting Principles Board's
Opinion No. 25 ("APB No. 25"). Under APB No. 25, compensation costs related
to share options issued pursuant to compensatory plans are measured based on
the difference between the quoted market price of the shares at the
measurement date (originally the date of grant) and the exercise price and
charged to expense over the periods during which the grantee performs the
related services. All share options issued to date by the Company have
exercise prices equal to the market price of the shares at the dates of
grant.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted SFAS No. 128, "Earnings Per Share"
("EPS") which supersedes APB No. 15 for periods ending after December 15,
1997. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Primary EPS and Fully Diluted EPS are
replaced by Basis EPS and Diluted EPS, respectively. Basic EPS, unlike
Primary EPS, excludes all dilution while Diluted EPS, like Fully Diluted EPS,
reflects the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted into common
shares.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and displaying of comprehensive income and its components.
This statement requires a separate statement to report the components of
comprehensive income for each period reported. The provisions of this
statement are effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the impact that SFAS 130 will have on its
financial statement disclosures.
F-11
<PAGE> 45
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
establishes standards for the way in which public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services, and
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company is currently
evaluating the impact that SFAS 131 will have on its financial statement
disclosures.
MODIFICATION OF COMPUTER SOFTWARE FOR THE YEAR 2000 (UNAUDITED)
The Company is currently evaluating its equipment for use in the Year
2000. Work plans detailing the tasks and resources required to insure that
equipment is Year 2000 compliant are currently being developed and in many
cases are already being implemented or Year 2000 compliant systems have been
installed. CBHS expects to spend $1 million in the aggregate during fiscal
1998 and fiscal 1999 to modify internal use software. The Company does not
anticipate incurring any other significant costs to make equipment Year 2000
compliant. Costs associated with modifying equipment to be Year 2000
compliant are charged to expense as incurred.
3. ACQUISITIONS
On May 9, 1997, Crescent Operating acquired (i) all of the stock of
Moody-Day, a construction equipment sales, leasing and servicing company
located in Dallas, Texas, (ii) a 1.21% interest in Hicks-Muse, a private
venture capital fund and (iii) a 12.38% interest in Dallas Basketball
Limited, a partnership that holds the National Basketball Association
franchise for the Dallas Mavericks. The allocation of purchase price was
approximately $4.1 million for Moody-Day, approximately $9.6 million for the
Hicks-Muse interest and approximately $12.4 million for the interest in the
Dallas Basketball partnership. The interest in the Dallas Basketball
partnership was subsequently sold to Crescent Partnership for approximately
$12.5 million.
On June 17, 1997, Crescent Operating acquired, for $5.0 million, a 50%
member interest in CBHS and issued warrants to acquire 282,508 shares of
Crescent Operating common stock with an exercise price of $18.29 per share to
Magellan Health Services, Inc. ("Magellan"). As required by CBHS' operating
agreement, the Company contributed an additional $2.5 million to CBHS. CBHS
is a newly formed limited liability company which operates approximately 90
behavioral healthcare facilities throughout the United States. Crescent
Operating also purchased as part of this acquisition warrants to acquire
1,283,311 shares of Magellan common stock for $12.5 million. The exercise
price of the Magellan warrants is $30 per share, exercisable in varying
increments beginning on May 31, 1998 and ending on May 31, 2009. Management
estimates the fair value of the warrants, using the Black-Sholes pricing
model, to be $16.4 million at December 31, 1997. In August and September of
1997, Crescent Operating made loans (evidenced by promissory notes) to CBHS
in the aggregate principal amount of $17.5 million (the "Initial Amount"). On
November 16, 1997, effective September 30, 1997, following the request of
Charter, Inc. each of the promissory notes was exchanged for cumulative
redeemable preferred interests (the "Redeemable Preferred Interests") in
CBHS. The Redeemable Preferred Interest entitles its holder to a preferred
return on the profits of CBHS, which is to be calculated at the rate of 10%
per annum of the Initial Amount, compounded monthly. CBHS, upon approval of
at least 80% of the members of its Governing Board, may redeem all, but not
less than all, of the Redeemable Preferred Interests, at its option, on or
after April 1, 1998, for cash or promissory notes, or a combination thereof,
provided that the Company and Magellan are treated identically.
On July 31, 1997, Crescent Operating, through its newly-formed subsidiary,
WOCOI, acquired for $.4 million, a 42.5% general partner interest in The
Woodlands Operating Company, L.P. ("Woodlands Operating"). Woodlands
Operating was formed to provide management, advisory, landscaping and
maintenance services to entities affiliated with the Company and Crescent
Equities. Woodlands Operating is reimbursed for the costs it incurs plus a 3%
or 5% management fee, depending on the type of service provided. The
acquisition of Woodlands Operating was part of a larger transaction pursuant
to which Crescent Equities and Crescent Partnership, together with certain
Morgan Stanley funds, acquired The Woodlands Corporation. The Woodlands
Corporation is the principal owner, developer and operator of The Woodlands,
an approximately 27,000-acre master-planned residential and commercial
community located approximately 27 miles north of Houston, Texas. The
Woodlands includes a shopping mall, retail centers, office buildings,
conference center and country club and other amenities. WOCOI serves as
the managing general partner of Woodlands Operating.
F-12
<PAGE> 46
Effective July 31, 1997, Crescent Operating acquired for $2.0 million in
cash the following assets: (i) 100% of the membership interests in Rosestar
and (ii) all of the common stock, $.01 par value, of each of RSSW Corp. and
RSCR Arizona Corp., affiliates of RoseStar. RoseStar and its subsidiaries are
the lessees of 6 hotels owned by Crescent Equities or its affiliates. These
hotels are the Denver Marriott City Center and the Hyatt Regency Beaver Creek
in Colorado, the Hyatt Regency in Albuquerque, New Mexico, Canyon Ranch in
Tucson, Arizona, Canyon Ranch in Lennox, Massachusetts and The Sonoma Mission
Inn & Spa in California.
On September 22, 1997, COI Hotel, became the lessee of the Four Seasons
Hotel in Houston, Texas, which is owned by Crescent Equities, and acquired
for $2.4 million (i) a two-thirds interest in the Houston Center Athletic
Club Venture ("HCAC"), a joint venture that owns the HCAC and (ii) a $5.0
million note executed by the Houston Center Athletic Club Venture. The note
bears interest at LIBOR plus one percent and interest is payable in arrears
at the end of each twenty-eight (28) day period. The Company partially
financed these transactions with proceeds of $1.8 million in loans from
Crescent Partnership. The Company has recorded the note on its books at its
estimated fair value of $5.0 million. The investment in HCAC was recorded at
its book basis of ($1.6) million and the remaining ($1.0) million was
recorded as negative goodwill.
On September 29, 1997, Crescent Operating acquired 100% of the voting
stock, representing a 5% equity interest, of Desert Mountain Development for
$2.2 million. Desert Mountain Development is the sole general partner of
Desert Mountain Properties Limited Partnership ("DMPLP"). DMPLP owns Desert
Mountain, a master planned, luxury residential and recreational community in
northern Scottsdale, Arizona. DMPLP also owns and operates The Desert
Mountain Club that offers four Jack Nicklaus signature 18 hole golf courses,
including Cochise, site of the Senior PGA Tour's The Tradition tournament.
Desert Mountain was acquired in August 1997, by Crescent Equities for
approximately $235.0 million from Mobil Land Development Corporation and a
company owned by Lyle Anderson. Mr. Anderson serves as the development and
operations manager of Desert Mountain Development.
On September 29, 1997, Crescent Operating acquired 100% of the voting
stock, representing a 5% equity interest, of LandCo, for approximately $1.9
million. LandCo is a newly-formed residential development corporation which
was owned by Crescent Equities. LandCo holds a 42.5% general partner interest
in, and is the managing general partner of, The Woodlands Land Development
Company, L.P. ("Landevco"), which owns approximately 9,000 acres for
commercial and residential development, a realty office, an athletic center,
and interests in a title company and a mortgage company.
Effective December 1, 1997, Crescent Operating acquired Preco Machinery
Sales, Inc. ("Preco"), a heavy equipment sales and leasing company based in
Houston, Texas. The purchase price of Preco was approximately $4 million and
consisted of a cash payment of approximately $1.7 million and the issuance of
130,000 restricted shares of Crescent Operating common stock. The transaction
was structured such that Preco became a division of Moody-Day.
Effective October 31, 1997, Crescent Operating acquired, from Crescent
Partnership, for approximately $8.0 million, 100% of the voting stock,
representing a 5% equity interest, of CS I and CS II. CS I holds a 40%
general partner interest in Vornado Crescent Atlanta Partnership ("Atlanta
Partnership"), which owns URS Logistics, Inc., a company that operates and
manages public refrigerated warehouses in the continental United States.
CS II holds a 40% general partner interest in Vornado Crescent Portland
Partnership ("Portland Partnership"), which owns Americold Corporation,
a company providing integrated logistics services for the frozen food
industry consisting of warehousing and transportation. The Atlanta
Partnership and the Portland Partnership (collectively, the "Vornado Crescent
Partnerships") represent the business venture among Crescent Operating,
Crescent Equities and Vornado Realty Trust ("Vornado") which owns and
operates 80 public refrigerated warehouses representing over 394 million
cubic feet of cold storage capacity.
All of the acquisitions were accounted for as purchases and operations
have been included in the consolidated financial statements of the Company
from the effective date of the transactions.
F-13
<PAGE> 47
4. PROPERTY & EQUIPMENT, NET:
Property and equipment at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land and improvements ....................... $ 44,028,503 $ 452,397
Rental equipment ............................ 13,962,372 7,733,007
Buildings and improvements .................. 23,493,050 680,895
Transportation equipment .................... 826,460 375,721
Furniture, fixtures, and other equipment .... 12,244,319 368,752
------------ ------------
94,554,704 9,610,772
Less accumulated depreciation ............... (3,575,671) (2,927,314)
------------ ------------
Property and equipment, net ................. $ 90,979,033 $ 6,683,458
============ ============
</TABLE>
5. INVESTMENTS:
Investments at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Investment in CBHS .......................... $ 5,390,000 $ --
Investment in Magellan warrants ............. 12,500,000 --
Investment in Landevco ...................... 31,403,893 --
Investment in Woodlands Operating ........... 597,498 --
Investment in Vornado Crescent Atlanta
Partnership ............................... 73,392,800 --
Investment in Vornado Crescent Portland
Partnership ............................... 88,458,000 --
Investment in HCAC .......................... (1,513,923) --
Investment in Hicks-Muse .................... 9,446,946 7,593,493
------------ ------------
$219,675,214 $ 7,593,493
============ ============
</TABLE>
Investment (income) loss for the period from May 9, 1997 through December 31,
1997 consisted of the following:
<TABLE>
<S> <C>
Equity in loss of CBHS....................... $ 19,610,000
Equity in income of Landevco................. (2,398,275)
Equity in income of Woodlands Operating...... (155,125)
Equity in loss of Vornado Crescent Atlanta
Partnership ............................... 65,600
Equity in income of Vornado Crescent
Portland Partnership....................... (101,600)
Equity in income of HCAC..................... (9,239)
Hicks-Muse income............................ (588,683)
------------
$ 16,422,678
============
</TABLE>
F-14
<PAGE> 48
A summary of financial information for the Company's investment in CBHS
and CS I and CS II's investment in the Vornado Crescent Partnerships are
provided as they represent significant unconsolidated subsidiaries.
<TABLE>
<CAPTION>
Vornado Vornado
Crescent Atlanta Crescent Portland
CBHS Partnership Partnership
----------------- ----------------- -----------------
198 Days Ended 2 Months Ended 2 Months Ended
December 31, 1997 December 31, 1997 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net revenue ............................ $ 391,788,000 $ 26,571,000 $ 52,128,000
Operating expenses (1) ................. 428,046,000 23,365,000 44,534,000
Interest expense, net .................. 2,962,000 3,481,000 6,916,000
Income tax provision (benefit) ......... -- (111,000) 424,000
----------------- ----------------- -----------------
Net income (loss) .................... $ (39,220,000) $ (164,000) $ 254,000
================= ================= =================
Crescent Operating's equity in
income (loss) of unconsolidated
subsidiary ........................... $ (19,610,000) $ (65,600) $ 101,600
================= ================= =================
</TABLE>
(1) Includes amounts such as: salaries, supplies and other operating
expenses, bad debt expense, franchise fees, management fees,
depreciation and amortization.
<TABLE>
<CAPTION>
Vornado Vornado
Crescent Atlanta Crescent Portland
CBHS Partnership Partnership
----------------- ----------------- -----------------
December 31, December 31, December 31,
1997 1997 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current assets ......................... $ 149,724,000 $ 5,082,000 $ 12,489,000
Property and equipment, net ............ 18,217,000 435,977,000 737,749,000
Other noncurrent assets ................ 8,081,000 102,882,000 187,226,000
----------------- ----------------- -----------------
Total assets ......................... $ 176,022,000 $ 543,941,000 $ 937,464,000
================= ================= =================
Current liabilities .................... $ 83,478,000 $ 17,363,000 $ 55,120,000
Long term debt ......................... 65,846,000 221,463,000 416,584,000
Other noncurrent liabilities ........... 16,820,000 121,846,000 244,402,000
Member's capital/stockholders'
equity ................................. 9,878,000 183,269,000 221,358,000
----------------- ----------------- -----------------
Total liabilities and
member/stockholders' equity ......... $ 176,022,000 $ 543,941,000 $ 937,464,000
================= ================= =================
</TABLE>
F-15
<PAGE> 49
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consisted of the following at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Accounts payable ......................... $ 21,379,659 $ 549,643
Accrued interest ......................... 7,374,203 --
Accrued salaries and bonuses ............. 5,022,392 --
Land development construction accrual..... 4,644,000 --
Accrued taxes ............................ 3,700,584 --
Accrued transaction costs ................ 2,188,980 --
Dues repayment accrual ................... 1,022,023 --
Other .................................... 3,988,891 232,924
------------ ------------
$ 49,320,732 $ 782,567
============ ============
</TABLE>
7. OTHER LIABILITIES:
Other liabilities consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred revenue ......................... $ 17,477,576 $ --
Deferred rent ............................ 1,199,323 --
Deferred tax liability ................... 472,241 369,806
Other .................................... 2,476,911 --
------------ ------------
$ 21,626,051 $ 369,806
============ ============
</TABLE>
8. LONG-TERM DEBT:
Following is a summary of the Company's debt financing:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
LONG-TERM DEBT - CEI
Note payable to Crescent Partnership due May 2002, bears
interest at 12% payable quarterly, collateralized by a
first lien on the assets owned by the Company as of June
30, 1997. (COI) ........................................... $ 25,980,000
Line of credit in the amount of $20.4 million payable to
Crescent Partnership due later of May 2002 or five years
after last draw, bears interest at 12% payable
quarterly, collateralized by first lien on the assets
owned by the Company as of June 30, 1997. (COI) ........... 13,725,000
Notes payable to Crescent Partnership maturing August
1998, bears interest at the prime rate plus 1% (9.5% at
December 31, 1997), principal and interest payable
monthly based on lot note receipts collateralized by
deeds of trust on lots in Desert Mountain. (DMPLP) ........ 17,590,034
</TABLE>
F-16
<PAGE> 50
<TABLE>
<S> <C>
Junior note payable to Crescent Partnership maturing
December 2010, bears interest at 14%, principal and
interest payable quarterly commencing January 15, 1998
based on sales proceeds from DMPLP, collateralized by
land, improvements and equipment at DMPLP. (DMPLP) ........ 60,000,000
Senior note payable to Crescent Partnership maturing
December 2005, bears interest at 10%, principal and
interest payable quarterly commencing January 15, 1998
based on sales proceeds from DMPLP, collateralized by
land, improvements and equipment at DMPLP. (DMPLP) ........ 110,000,000
Note payable to Crescent Partnership due September 1998,
bears interest at 8.5% payable monthly, collateralized
by the HCAC $5.0 million note receivable. (COI Hotel) ..... 1,000,000
Note payable to Crescent Partnership maturing August
2003, bears interest at 10.75%, principal and interest
payable monthly, collateralized by a deed of trust for
certain property and real property. (RoseStar) ............ 2,052,482
Note payable to Crescent Partnership maturing September
2002, bears interest at 8.5%, principal and interest
payable monthly, collateralized by the 2/3 interest in
HCAC. (COI Hotel) ......................................... 789,820
Note payable to Crescent Partnership maturing August
2003, bears interest at 10.75%, principal and interest
payable monthly, collateralized by a deed of trust in
certain real property and certain personal property
(RoseStar) ................................................ 554,850
Note payable to Crescent Partnership due November 2006,
bears interest at 7.5% payable annually. (RoseStar) ....... 190,964
------------
Total debt - CEI .......................................... 231,883,150
Less - current maturities ................................. (24,084,587)
------------
$207,798,563
============
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
LONG-TERM DEBT-OTHER
Line of credit in the amount of $15.0
million payable to NationsBank due August
1998, interest payable monthly at LIBOR
plus 1% (6.88% at December 31, 1997). (COI) ................ $ 15,000,000 $ --
Equipment notes payable to finance
companies due 1998 through 2003 with
monthly principal and interest payments,
bear interest from 8.5% to 10.5%,
collateralized by equipment. (Moody-Day) ................... 11,245,727 727,512
</TABLE>
F-17
<PAGE> 51
<TABLE>
<S> <C> <C>
Line of credit payable to Carter-Crowley
Properties, Inc., bears interest at prime
plus 1%, principal and interest payable
monthly, collateralized by land and
equipment. The line was paid in full
during 1997 ................................. -- 4,677,837
------------ ------------
Total debt - other .......................... 26,245,727 5,405,349
Less - current maturities ................... (18,759,349) (2,205,742)
------------ ------------
$ 7,486,378 $ 3,199,607
============ ============
</TABLE>
The Company's subsidiary, Desert Mountain Development, has a $7.6 million
revolving credit agreement with Crescent Partnership which bears interest at
10% per annum. The agreement expires in March of 1998 at which time the
outstanding principal balance and accrued interest becomes due. In connection
with this agreement, DMPLP has also entered into an $8.0 million revolving
credit agreement with Desert Mountain Development which bears interest at the
annual rate equal to the prime rate plus 1%. This agreement expires in March
of 1998 at which time the outstanding principal balance and accrued interest
becomes due. At December 31, 1997, no amounts were outstanding under either
of the above agreements.
The weighted average interest rate on long-term debt at December 31, 1997 was
approximately 11%. Substantially all of the Company's assets are pledged as
collateral under various debt agreements. Payment of dividends on Crescent
Operating common stock is prohibited under certain of the debt agreements.
The debt agreements contain certain reporting requirements and financial
covenants, including requirements that the Company maintain certain financial
ratios. As of December 31, 1997, the Company had complied with all debt
covenants.
As of December 31, 1997, combined aggregate principal maturities of all
long-term debt were as follows:
<TABLE>
<S> <C>
1998......................................... $42,843,936
1999......................................... 18,502,644
2000......................................... 23,846,767
2001......................................... 24,254,389
2002......................................... 63,121,793
Thereafter................................... 85,559,348
------------
Total........................................ $258,128,877
============
</TABLE>
9. SHAREHOLDERS' EQUITY:
Common Stock
The Company's authorized capital stock consists of 10 million shares of
preferred stock, par value $.01 per share and 22.5 million shares of common
stock, par value $.01 per share. At December 31, 1997, there were 11,211,094
shares of common stock issued and outstanding and no shares of preferred
stock issued and outstanding.
Earnings Per Share
The Company had 847,579 stock options and 282,508 warrants outstanding as
of December 31, 1997. Such stock options and warrants were not included in
the loss per share computations since they would have an antidilutive effect
on loss per share. Such stock options and warrants could potentially dilute
income per share in a future period.
Earnings per share for the Predecessor is not meaningful as the capital
structure of the Predecessor was not comparable to that of the Company.
F-18
<PAGE> 52
Preferred Share Purchase Rights
The Board of Directors has adopted a rights plan that provides that each
holder of Crescent Operating common stock also receives a right to purchase
from the Company one-hundredth of a share of Series A Junior Preferred Stock,
par value $.01, at a price of $5 per share, subject to adjustment. These
rights can only be exercised in certain events and are intended to provide
the Company certain anti-takeover protection. The Company had reserved
225,000 shares of Series A Junior Preferred Stock for this plan.
Warrants
The Company, in conjunction with the acquisition of a 50% member interest
in CBHS, issued warrants to acquire 282,508 shares of Crescent Operating
common stock at an exercise price of $18.29 per share.
10. STOCK OPTION PLANS:
The Company has two stock incentive plans, the 1997 Amended Stock
Incentive Plan (the "Amended Plan") and the 1997 Management Stock
Incentive Plan (the "Management Plan").
The Amended Plan, effective May 8, 1997, initially established the maximum
number of options and/or restricted stock that the Company may grant at
1,000,000 shares. The maximum aggregate number of shares of the Amended Plan
shall increase automatically on January 1 of each year by an amount equal to
8.5% of the increase in the number of shares of common stock outstanding
since January 1 of the preceding year, subject to certain adjustment
provisions. As of January 1, 1998, the number of shares the Company may have
outstanding under the Amended Plan is 1,000,000.
On May 13, 1997, options were granted to each holder of shares of
restricted stock in Crescent Equities or options in Crescent Equities or
Crescent Partnership an equivalent number of shares of restricted stock or
options in Crescent Operating, based on a ratio of one share of restricted
stock or option to purchase Crescent Operating common stock for each 10
shares of restricted stock in Crescent Equities or options for Crescent
Operating common shares, and one option to purchase Crescent Operating common
stock for each 5 options for units. Under the Amended Plan, the Company has
granted options and restricted shares of 893,567 and 10,000 respectively,
through December 31, 1997.
The Management Plan allows for the maximum number of options and/or
restricted stock that the Company may grant to employees, officers, directors
or consultants to be 1,000,000 shares. Under the Management Plan, the Company
has not granted options or restricted shares. This plan is subject to
shareholder approval.
Under both Plans, options are granted at a price no less than the market
value of the shares on the date of grant, vest over a period determined by
the Board of Directors, and expire ten years from the date of grant. The
Company has reserved 1.1 million shares for future options and warrants.
A summary of the stock option status of the Company's Amended and
Management Plans as of December 31, 1997 and changes during the period then
ended is presented in the table below:
F-19
<PAGE> 53
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
-------- --------
<S> <C> <C>
Outstanding as of May 8, 1997 .................... -- --
Granted .......................................... 893,567 $ 1.15
Exercised ........................................ (45,489) $ .99
Forfeited ........................................ (499) $ .99
Expired .......................................... -- --
-------- --------
Outstanding/Weighted Average as of
December 31, 1997 ................................ 847,579 $ 1.16
-------- --------
Exercisable/Weighted Average as of
December 31, 1997 ................................ 435,776 $ .99
-------- --------
</TABLE>
The Company applies APB No. 25 in accounting for options granted pursuant
to the Amended Plan and the Management Plan (collectively, the "Plans").
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair market
value at the grant dates for awards under the Plans consistent with SFAS No.
123, the Company's net loss and loss per share would have been increased to
the following pro forma amounts:
<TABLE>
<CAPTION>
1997
--------------------------------
As reported Pro forma
------------- -------------
<S> <C> <C>
Net Loss .............................. ($ 22,165,218) ($ 22,257,598)
Loss per share ........................ ($2.00) ($2.01)
</TABLE>
At December 31, 1997, the weighted average fair value of each option
outstanding was $.87 and 847,579 options were outstanding with an exercise
price of $.99.
The fair value of each option was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions: risk free
interest rates of 6.7%; expected dividend yields of 0%; expected lives of 5
years; expected volatility of 94.7%.
11. INCOME TAXES:
The components of the Company's income tax provision (benefit) were as
follows:
<TABLE>
<CAPTION>
For the Period For the Period
From From Year Ended December 31,
May 9, 1997 to January 1, 1997 to --------------------------
December 31, 1997 May 8, 1997 1996 1995
----------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C>
Current:
Federal .................... $ 79,262 $ -- $ (208,855) $ 15,362
State ...................... 10,671 -- -- --
----------------- ------------------ ---------- ----------
89,933 -- (208,855) 15,362
----------------- ------------------ ---------- ----------
Deferred:
Federal .................... 522,708 13,682 151,178 29,421
State ...................... -- -- -- --
----------------- ------------------ ---------- ----------
522,708 13,682 151,178 29,421
----------------- ------------------ ---------- ----------
Total income tax
provision (benefit) ..... $ 612,641 $ 13,682 $ (57,677) $ 44,783
================= ================== ========== ==========
</TABLE>
Reconciliation's of the federal statutory income tax rate to the effective
tax rate, were as follows:
F-20
<PAGE> 54
<TABLE>
<CAPTION>
For the Period For the Period
From From Year Ended December 31,
May 9, 1997 to January 1, 1997 -----------------------
December 31, 1997 To May 8, 1997 1996 1995
----------------- --------------- -------- --------
<S> <C> <C> <C> <C>
Federal statutory income tax rate ........... (35.0%) 35.0% (35.0%) 35.0%
State income taxes, net of federal tax
benefit .................................. (2.9) -- -- --
Non-deductible expenses ..................... -- -- -- 1.1
Change in valuation allowance................ 40.3 -- -- --
Other, net .................................. .4 -- .8 --
----------------- --------------- -------- --------
Effective tax rate ...................... 2.8% 35.0% (34.2%) 36.1%
================= =============== ======== ========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Equity in earnings of subsidiaries ........ $ 6,146,977 $ --
Deferred revenue/rental income ............ 1,398,805 --
Property and equipment .................... 1,633,048 --
Inventories ............................... -- 11,220
Net operating loss carryforwards .......... 999,988 70,767
Other ..................................... 337,023 10,725
------------ ------------
Deferred tax asset ...................... 10,515,841 92,712
------------ ------------
Deferred tax liabilities:
Prepaid expenses .......................... (556,698) --
Rental equipment .......................... -- (366,251)
Property and equipment .................... -- (3,555)
------------ ------------
Deferred tax liability .................. (556,698) (369,806)
------------ ------------
Valuation allowance ......................... (9,761,855) (62,007)
------------ ------------
Net deferred tax asset (liability) ...... $ 197,288 $ (339,101)
============ ============
Current deferred tax asset .................. 669,529 30,705
Noncurrent deferred tax liability ........... (472,241) (369,806)
------------ ------------
Net deferred tax asset (liability) ...... $ 197,288 $ (339,101)
============ ============
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $2,636,403, which will expire in years 2003 through
2012. A valuation allowance has been recorded to offset the majority of the
deferred tax assets due to the uncertainty of the ultimate realization of the
deferred tax assets in future years.
12. COMMITMENTS AND CONTINGENCIES:
Capital Commitments
The Company is committed to investing an additional $1.3 million into the
Hicks-Muse partnership to fund Hicks-Muse investments. This additional amount
of capital is required to be paid when called by the Hicks-Muse partnership.
Lease Commitments
The Company leases eight hotel and resort properties from Crescent
Equities. Generally, the leases are on a triple net basis during 120-month
terms and expire from December 2004 to October 2006. The leases provide
F-21
<PAGE> 55
for the payment to Crescent Partnership or its subsidiaries (i) base rent,
with periodic rent increases, (ii) percentage rent based on a percentage of
gross room revenues above a specified amount, and (iii) a percentage of gross
food and beverage revenues above a specified amount. Base rental expense
under the leases are recognized on a straight-line basis over the terms of
the respective leases. Total lease expense during the period ended December
31, 1997 was approximately $16.7 million.
Future minimum lease payments due under such leases as of December 31,
1997, were as follows:
<TABLE>
<S> <C>
1998......................................... $ 32,806,817
1999......................................... 33,743,769
2000......................................... 34,276,986
2001......................................... 34,307,213
2002......................................... 34,422,327
Thereafter................................... 131,961,274
------------
$301,518,386
============
</TABLE>
Contingencies
The Company currently is not subject to any material legal proceedings or
claims nor, to management's knowledge, are any material legal proceedings or
claims currently threatened.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest paid, net of amounts capitalized .................. $ 2,574,471 $ 352,773 $ 44,039
============ ============ ============
Taxes paid (refunded) ...................................... $ 4,369 $ (19,502) $ (22,462)
============ ============ ============
Non-cash investing and financing activities:
The Company purchased the investments for
$82,694,465. In conjunction with the acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired ....................... $597,075,348 $ -- $ --
Stock issued for the acquisitions ................... (2,340,000) -- --
Cash paid for the acquisitions ...................... (82,694,465) -- --
------------ ------------ ------------
Liabilities assumed .............................. $512,040,883 $ -- $ --
============ ============ ============
</TABLE>
14. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable,
inventories, notes receivable, prepaid expenses and other current assets, and
accounts payable and accrued expenses approximates fair value as of December
31, 1997 because of the short maturity of these instruments. Similarly, the
carrying value of line of credit borrowings approximates fair value as of
that date because the interest rate fluctuates based on published market
rates. In the opinion of management, the interest rates associated with the
long-term debt approximates the market interest rates for this type of
instrument, and as such, the carrying values approximate fair value at
December 31, 1997.
15. PRO FORMA INFORMATION (UNAUDITED):
The following pro forma information assumes that all significant
transactions occurred on the first day of the period presented. These
significant transactions include: (i) the capitalization of the Company, (ii)
the acquisition of the Carter-Crowley Asset Group, (iii) the investment in
CBHS, (iv) the acquisition of Woodlands Operating and LandCo, (v) the
acquisition of RoseStar, (vi) the acquisition of Desert Mountain Development,
(vii) the acquisition of Preco assets, (viii) the acquisition of CS I, and
(ix) the acquisition of CS II.
F-22
<PAGE> 56
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues ................................ $337,085,000 $274,766,000
Net loss ................................ $ 22,081,000 $ 9,961,000
Net loss per share ...................... $ (1.97) $ (.89)
</TABLE>
16. BUSINESS SEGMENT INFORMATION:
Business segment information is summarized as follows:
<TABLE>
<CAPTION>
Crescent Operating, Inc. Carter-Crowley Asset Group (Predecessor)
------------------------ -----------------------------------------------------------
For the Period from For the Period from For the For the
May 9, 1997 To January 1, 1997 to Year Ended Year Ended
December 31, 1997 May 8, 1997 December 31, 1996 December 31, 1995
------------------------ ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Equipment Sales and Leasing ............ $ 10,517,817 $ 4,657,260 $ 10,393,683 $ 9,147,242
Hospitality ............................ 79,467,764 -- -- --
Land Development ....................... 66,896,540 -- -- --
Refrigerated Warehousing ............... -- -- -- --
Healthcare ............................. -- -- -- --
Other .................................. -- -- -- --
------------------------ ------------------- ----------------- -----------------
Total Revenues ......................... $ 156,882,121 $ 4,657,260 $ 10,393,683 $ 9,147,242
======================== =================== ================= =================
Income (loss) from operations:
Equipment Sales and Leasing ............ $ 734,983 $ 158,115 $ 108,973 $ 89,393
Hospitality ............................ 231,502 -- -- --
Land Development ....................... (198,502) -- -- --
Refrigerated Warehousing ............... -- -- -- --
Healthcare ............................. -- -- -- --
Other .................................. (1,760,609) -- -- --
------------------------ ------------------- ----------------- -----------------
Total income (loss) from operations .... $ (992,626) $ 158,115 $ 108,973 $ 89,393
======================== =================== ================= =================
Depreciation and Amortization:
Equipment Sales and Leasing ............ $ 1,892,130 $ 493,778 $ 1,367,579 $ 1,166,102
Hospitality ............................ 346,949 -- -- --
Land Development ....................... 1,419,607 -- -- --
Refrigerated Warehousing ............... -- -- -- --
Healthcare ............................. -- -- -- --
Other .................................. -- -- -- --
------------------------ ------------------- ----------------- -----------------
Total Depreciation and Amortization .... $ 3,658,686 $ 493,778 $ 1,367,579 $ 1,166,102
======================== =================== ================= =================
Equity in Income (Loss) of Equity
Method Investees:
Equipment Sales and Leasing ........... $ -- $ -- $ -- $ --
Hospitality ........................... 9,239 -- -- --
Land Development ...................... 2,553,400 -- -- --
Refrigerated Warehousing .............. 36,000 -- -- --
Healthcare ............................ (19,610,000) -- -- --
Other ................................. -- -- -- --
------------------------ ------------------- ----------------- -----------------
Total Equity In Income (Loss) of
Equity Method Investees ............... $ (17,011,361) $ -- $ -- $ --
======================== =================== ================= =================
Capital Expenditures:
Equipment Sales and Leasing ............ $ 8,613,424 $ 1,067,185 $ 4,375,793 $ 2,634,559
Hospitality ............................ 609,413 -- -- --
Land Development ....................... 3,820,480 -- -- --
Refrigerated Warehousing ............... -- -- -- --
Healthcare ............................. -- -- -- --
Other .................................. -- -- -- --
------------------------ ------------------- ----------------- -----------------
Total Capital Expenditures ............. $ 13,043,317 $ 1,067,185 $ 4,375,793 $ 2,634,559
======================== =================== ================= =================
Identifiable Assets:
Equipment Sales and Leasing ............ $ 27,843,022 $ 17,482,733 $ 13,230,016
Hospitality ............................ 39,145,825 -- --
Land Development ....................... 328,278,985 -- --
Refrigerated Warehousing ............... 161,850,800 -- --
Healthcare ............................. 5,390,000 -- --
Other .................................. 23,468,444 -- --
------------------------ ----------------- -----------------
Total Identifiable Assets .............. $ 585,977,076 $ 17,482,733 $ 13,230,016
======================== ================= =================
</TABLE>
F-23
<PAGE> 57
17. RELATED PARTY TRANSACTIONS:
INTERCOMPANY AGREEMENT
Crescent Operating and Crescent Partnership have entered into the
Intercompany Agreement to provide each other with rights to participate in
certain transactions. The Intercompany Agreement provides, subject to certain
terms, that Crescent Partnership will provide Crescent Operating with a right
of first refusal to become the lessee of any real property acquired by
Crescent Partnership if Crescent Partnership determines that, consistent with
Crescent Equities' status as a REIT, it is required to enter into a "master"
lease arrangement. Crescent Operating's right of first refusal under the
Intercompany Agreement is conditioned upon the ability of Crescent Operating
and Crescent Partnership to negotiate a mutually satisfactory lease
arrangement and Crescent Partnership must have determined, in its sole
discretion, that Crescent Operating is qualified to be the lessee. For
example, Crescent Equities generally would be required, consistent with its
status as a REIT, to enter into a master lease arrangement as to hotels and
behavioral healthcare facilities. In general, a master lease arrangement is
an arrangement pursuant to which an entire property or project (or a group of
related properties or projects) is leased to a single lessee. As to
opportunities for Crescent Operating to become the lessee of any assets under
a master lease arrangement, the Intercompany Agreement provides that Crescent
Partnership must provide Crescent Operating with written notice of the lessee
opportunity. During the 30 days following such notice, Crescent Operating has
a right of first refusal with regard to the offer to become a lessee and the
right to negotiate with Crescent Partnership on an exclusive basis regarding
the terms and conditions of the lease. If a mutually satisfactory agreement
cannot be reached within the 30-day period (or such longer period to which
Crescent Operating and Crescent Partnership may agree), Crescent Partnership
may offer the opportunity to others for a period of one year thereafter
before it must again offer the opportunity to Crescent Operating, in
accordance with the procedures specified above. In practice, the fast-paced
acquisitions of Crescent Partnership have required Crescent Operating to
waive the 30-day period. Crescent Partnership may, in its discretion, offer
any investment opportunity other than a lessee opportunity to Crescent
Operating, upon such notice and other terms as Crescent Partnership may
determine. Crescent Operating has been offered lessee and other opportunities
for the 42.5% general partner interest in Woodlands Operating, the Ventana
Country Inn, the Four Seasons Hotel in Houston, the two-thirds interest in
the Houston Center Athletic Club Venture and all of the voting stock
(representing 5% of the equity) in Desert Mountain Development, The Woodlands
Land Company, Inc. and Crescent CS Holdings Corp. and Crescent CS Holdings II
Corp. (which hold interests in Desert Mountain, Woodlands Land Development
Company, URS Logistics and Americold Corporation, respectively). Crescent
Operating has accepted each of these opportunities following negotiation of
terms with Crescent Partnership and review by the Intercompany Committee of
the Board of Directors, a committee whose membership consists of directors
unassociated with Crescent Partnership or Crescent Equities.
Under the Intercompany Agreement, Crescent Operating has agreed not to
acquire or make (i) investments in real estate which, for purposes of the
Intercompany Agreement, includes the provision of services related to real
estate and investment in hotel properties, real estate mortgages, real estate
derivatives or entities that invest in real estate assets or (ii) any other
investments that may be structured in a manner that qualifies under the
federal income tax requirements applicable to REITs, unless it has provided
written notice to Crescent Partnership of the material terms and conditions
of the acquisition or investment opportunity, and Crescent Partnership has
determined not to pursue such acquisitions or investments either by providing
written notice to Crescent Operating rejecting the opportunity within 10 days
from the date of receipt of notice of the opportunity or by allowing such
10-day period to lapse. Crescent Operating also has agreed to assist Crescent
Partnership in structuring and consummating any such acquisitions or
investments which Crescent Partnership elects to pursue, on terms determined
by Crescent Partnership. In addition, Crescent Operating has agreed to notify
F-24
<PAGE> 58
Crescent Partnership of, and make available to Crescent Partnership,
investment opportunities developed by Crescent Operating, or of which
Crescent Operating becomes aware but is unable or unwilling to pursue.
Crescent Operating has not yet notified Crescent Partnership of any such
opportunities.
OTHER TRANSACTIONS
Effective July 31, 1997, Crescent Operating purchased RoseStar from Gerald
Haddock, John Goff and Sanjay Varma. Mr. Haddock is the President, Chief
Executive Officer and Mr. Goff is the Vice-Chairman and director of each
Crescent Operating and Crescent Equities. Mr. Varma is a Vice President of
Crescent Operating and President of the Hospitality division of Crescent
Operating and together with his wife Johanna Varma, are the principals of The
Varma Group, a corporation that provides asset management services to
RoseStar and COI Hotel.
The Company leases full service hotels and destination health and fitness
resorts from Crescent Partnership, or other subsidiaries of Crescent
Equities, under operating leases. Crescent Partnership has agreed to fund all
capital expenditures relating to furniture, fixtures and equipment reserves
required under applicable management agreements on all properties except for
Canyon Ranch-Tucson. Total rent expense related to these leases totaled
approximately $16.7 million for the period from May 9, 1997 to December 31,
1997.
Crescent Operating has entered into a one-year contract (subject to
automatic renewal for one-year terms unless terminated by either party 60
days prior to any anniversary date of the contract) with Petroleum Financial
Inc. a company owned by Jeffrey L. Stevens, the Chief Operating Officer,
Secretary and Director of the Company, pursuant to which Petroleum Financial
Inc. provides certain services to Crescent Operating. These services include
accounting services, review or initial preparation of reports required to be
filed, reports to shareholders, and similar matters. Crescent Operating will
pay Petroleum Financial Inc. in monthly or quarterly installments based on
certain costs incurred by Petroleum Financial Inc., plus 5%.
The Company has various debt instruments payable to Crescent Partnership
with an aggregate amount outstanding at December 31, 1997 of $231.9 million.
See Note 8 for additional information.
The primary source of repayment of the NationsBank line of credit is
anticipated to be a future equity offering, which the Company has agreed to
use its best efforts to complete prior to maturity of the loan in August 1998
or 1999. The Company has obtained an agreement from Richard Rainwater, Gerald
Haddock and John Goff (each a stockholder, director and/or officer of the
Company) which provides that, if the Company does not raise from an equity
offering funds sufficient to pay the NationsBank line of credit when due (a
"Successful Offering"), each of Messrs. Rainwater, Haddock and Goff jointly
and severally agree to purchase the number of additional shares of the
Company's Common Stock necessary to fund repayment of the NationsBank line of
credit. The Company has agreed to sell such additional shares of common stock
to Messrs. Rainwater, Haddock, and Goff at a price equal to the average
closing bid price of the Company's common stock during the 10 days
immediately preceding the date NationsBank notifies Messrs. Rainwater,
Haddock and Goff that the Company has not completed a Successful Offering
prior to maturity of the NationsBank line of credit.
As part of the Company's acquisition of the Carter-Crowley Asset Group,
the Company acquired a 12.38% limited partner interest in Dallas Basketball
Limited (the "DBL Interest"), the partnership that owns the Dallas Mavericks.
As of June 11, 1997, the Company sold the DBL Interest, for approximately
$12.5 million, to a corporation wholly owned by Crescent Partnership.
18. SUBSEQUENT EVENTS:
On March 25, 1998, the Company was offered by Crescent Partnership the
opportunity to acquire an interest in certain acreage on which the sports
arena is to be erected in Dallas, Texas for the Dallas Mavericks, a National
Basketball Association club, and the Dallas Stars, a National Hockey League
club, along with interest in certain surrounding acreage that may be
developed for commercial purposes as well as an equity interest in the
sports arena. The Intercompany Committee of the Board of Directors has
approved the Company's acceptance of the offer, subject to negotiation of
satisfactory terms.
Effective March 3, 1998, Crescent Operating signed a definitive agreement
(the "Equity Purchase Agreement") to acquire from Charter Behavioral Health
Systems, Inc. ("Charter Inc.") its 50% membership interest (the "Interest")
in CBHS, the nation's largest provider of inpatient behavioral health care.
Under the Equity Purchase Agreement, Crescent Operating has agreed to issue
to Charter Inc., a subsidiary of Magellan, $30 million in registered Crescent
Operating common stock in consideration of the sale of the Interest.
F-25
<PAGE> 59
Also, effective March 3, 1998, CBHS signed a definitive agreement (the
"Purchase Agreement") to acquire from Magellan and certain direct and
indirect subsidiaries of Magellan (collectively, the "Sellers"), for a
purchase price of $280 million, equity interests in certain entities and the
assets of certain staff model clinics. Under the terms of the Purchase
Agreement, approximately $78 million of annual franchise fees currently paid
by CBHS to Magellan or its subsidiaries, would be eliminated. If CBHS is not
able to obtain funds to complete the purchase, which results in (i) the
transactions contemplated by the Purchase Agreement are not consummated
within the time periods specified in the Purchase Agreement or (ii) the
Purchase Agreement is terminated, Crescent Operating has agreed to pay to
Magellan a termination fee in the amount of $5.0 million ($2.5 million of
which would be payable in cash and $2.5 million of which would be payable in
shares of Crescent Operating common stock).
On February 25, 1998, the Company signed a letter of intent to purchase
certain assets of Central Texas Equipment Co., a company which is engaged in
construction sales, leasing and servicing, for a purchase price of
approximately $6.1 million. Crescent Operating anticipates that the purchase
price will be comprised of 50% cash and 50% restricted shares of Crescent
Operating common stock. The transaction is subject to a number of customary
conditions.
On February 4, 1998, The Ventana Country Inn closed its operations due to
a landslide that washed out Highway 1, the major access road to the property.
Management expects Highway 1 and the Ventana Country Inn to be re-opened by
May 1, 1998 although there can be no assurance that there will not be
unforeseen delays. The Company's loss is partially covered by its business
interruption insurance although management estimates that the Company's
uninsured portion of the loss will be in the range of $100,000 to $350,000.
On January 23, 1998, a subsidiary of the Company signed a 10 year lease
agreement with Crescent Partnership for the Austin Omni Hotel. The Austin
Omni Hotel is a 314-room full-service hotel located approximately four blocks
from the State Capital Building in Austin, Texas. The terms of the lease
agreement are generally consistent with other hospitality leases with
Crescent Partnership.
On January 16, 1998, Crescent Equities entered into a plan of merger
pursuant to which Station Casinos, Inc. ("Station") will merge (the "Merger")
with and into Crescent Equities. As part of the transactions associated with
the Merger, it is presently anticipated that certain operating assets and
employees of Station will be transferred to a limited liability company (the
"LLC") immediately prior to the Merger. While Crescent Operating has not been
offered a member interest in the LLC, Crescent Equities has stated that it
intends to offer such interest in the LLC to Crescent Operating. The Station
Merger has not been finalized and consummation is subject to various
conditions, including, among other customary conditions, (i) obtaining the
requisite consents and approvals of governmental and other entities, (ii)
obtaining the approval of Station common stockholders, (iii) the
effectiveness of the registration statement to be filed in connection with
the Station Merger and (iv) the execution by Station management of certain
ancillary agreements. There can be no assurances that Crescent Operating will
accept the interest in the LLC or that the Merger will be consummated.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
Period Ended December 31, 1997
-----------------------------------------------
Second (1) Third Fourth
------------ ----------- ------------
<S> <C> <C> <C>
Revenues ........................................................ $ 1,707,580 $31,353,190 123,821,351
Income (loss) from operations ................................... 282,698 23,769 (1,298,093)
Income (loss) before minority interests and income taxes ........ (261,978) (7,783,645) (12,940,877)
Minority interests .............................................. -- -- (566,077)
Income tax provision ............................................ -- -- 612,641
Net loss ........................................................ (261,978) (7,783,645) (14,119,595)
Basic and diluted loss per share ................................ (.02) (.71) (1.27)
</TABLE>
(1) Amounts include operations of the Company from May 9, 1997 (the date the
Company began activity) through June 30, 1997.
F-26
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE MEMBERS OF
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
We have audited the accompanying consolidated balance sheet of Charter
Behavioral Health Systems, LLC (a Delaware limited liability corporation) and
subsidiaries as of September 30, 1997, and the related consolidated statement
of operations, changes in members' capital and cash flows for the period June
17, 1997 to September 30, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Charter Behavioral
Health Systems, LLC and subsidiaries as of September 30, 1997, and the results
of their operations and their cash flows for the period June 17, 1997 to
September 30, 1997 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. The schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 14, 1997
F-27
<PAGE> 61
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(In thousands)
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents ............................... $ 23,443
Accounts receivable, less allowance for doubtful accounts
of $17,605 ........................................... 107,961
Accounts receivable due from Magellan ................... 5,090
Supplies ................................................ 2,313
Prepaid expenses ........................................ 9,385
Other current assets .................................... 345
---------
Total Current Assets ................................. 148,537
Property and Equipment:
Buildings and improvements .............................. 11,879
Equipment ............................................... 7,121
---------
19,000
Accumulated depreciation ................................ (662)
---------
18,338
Construction in progress ................................ 86
---------
Total Property and Equipment ......................... 18,424
Other long-term assets ..................................... 6,471
Goodwill, net of accumulated amortization of $3 ............ 286
Deferred financing fees, net of accumulated
amortization of $115 .................................... 1,876
---------
$ 175,594
=========
</TABLE>
F-28
<PAGE> 62
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(In thousands)
LIABILITIES AND MEMBERS' CAPITAL
<TABLE>
<S> <C>
Current Liabilities:
Accounts payable ............................ $ 34,864
Accrued liabilities ......................... 33,578
Current maturities of long-term debt and
capital lease obligations ................. 55
---------
Total Current Liabilities .............. 68,497
Long-Term Debt and Capital Lease Obligations ....... 65,860
Deferred Rent ...................................... 4,759
Reserve for Unpaid Claims .......................... 2,686
Minority Interest and Other Long-Term Liabilities... 36
Members' Capital:
Preferred interests ......................... 35,000
Common interests ............................ 15,000
Accumulated deficit ........................ (16,244)
---------
Total Members' Capital ................. 33,756
---------
$ 175,594
=========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this balance sheet.
F-29
<PAGE> 63
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 106 DAYS ENDED SEPTEMBER 30, 1997
(In thousands)
<TABLE>
<S> <C>
Net revenue ............................................. $ 213,730
---------
Costs and expenses:
Salaries, supplies and other operating expenses... 170,619
Franchise fees - Magellan ........................ 22,739
Crescent lease expense ........................... 16,919
Bad debt expense ................................. 17,437
Depreciation and amortization .................... 668
Interest, net .................................... 1,592
---------
Total costs and expenses .................... 229,974
---------
Net loss ................................................ $ (16,244)
=========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
F-30
<PAGE> 64
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE 106 DAYS ENDED SEPTEMBER 30, 1997
(In thousands)
<TABLE>
<CAPTION>
PREFERRED INTERESTS COMMON INTERESTS TOTAL
------------------- ------------------- ACCUMULATED MEMBERS'
COI MAGELLAN COI MAGELLAN DEFICIT CAPITAL
-------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Additions (Deductions):
Issuance of cumulative redeemable
preferred interest .... $ 17,500 $ 17,500 $ -- $ -- $ -- $ 35,000
Capital contributions ... -- -- 7,500 7,500 -- 15,000
Net loss ................ -- -- -- -- (16,244) (16,244)
-------- -------- -------- -------- -------- --------
Balances, September 30, 1997 $ 17,500 $ 17,500 $ 7,500 $ 7,500 $(16,244) $ 33,756
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
F-31
<PAGE> 65
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 106 DAYS ENDED SEPTEMBER 30, 1997
(In thousands)
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net loss ....................................................... $ (16,244)
---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of assets ....................................... (355)
Depreciation and amortization ................................ 668
Non-cash interest expense .................................... 115
Cash flows from changes in assets and liabilities,
net of effects from sales and acquisitions of businesses:
Accounts receivable, net .............................. (98,504)
Account receivable due from Magellan .................. (5,090)
Other current assets .................................. (5,089)
Other long-term assets ................................ (4,565)
Accounts payable and accrued liabilities .............. 53,458
Accrued interest payable .............................. 333
Deferred rent ......................................... 4,759
Reserve for unpaid claims ............................. 2,686
Other liabilities ..................................... (3)
---------
Total adjustments ..................................... (51,587)
---------
Net cash used in operating activities ............ (67,831)
---------
Cash Flows From Investing Activities
Capital expenditures ........................................... (149)
Purchase of information systems equipment from Magellan ........ (5,000)
Purchase of net assets from Magellan ........................... (11,288)
---------
Net cash used in investing activities ............ (16,437)
---------
Cash Flows From Financing Activities
Payments on debt and capital lease obligations ................. (16)
Proceeds from issuance of debt, net of issuance costs .......... 98,009
Proceeds from capital contributions - COI ...................... 7,500
Proceeds from capital contributions - Magellan ................. 2,218
---------
Net cash provided by financing activities ........ 107,711
---------
Net increase in cash and cash equivalents ............................. 23,443
Cash and cash equivalents at beginning of period ...................... --
---------
Cash and cash equivalents at end of period ............................ $ 23,443
=========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
F-32
<PAGE> 66
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Charter Behavioral Health
Systems, LLC, a Delaware limited liability corporation, ("CBHS" or the
"Company") include the accounts of the Company and its subsidiaries except
where control is temporary or does not rest with the Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company provides behavioral healthcare services in the United
States. The Company's principal services include inpatient treatment, day and
partial hospitalization services, group and individual outpatient treatment and
residential services.
On June 17, 1997 the Company began operations pursuant to a series of
transactions (the "Crescent Transactions") between Magellan Health Services,
Inc. ("Magellan"), Crescent Real Estate Equities Limited Partnership
("Crescent") and Crescent Operating, Inc., an affiliate of Crescent ("COI").
The Crescent Transactions provided for the following:
- - Magellan sold to Crescent 80 behavioral healthcare facilities (76
operating and four held for sale) ("Purchased Facilities") and related
medical office buildings formerly operated by Magellan.
- - Magellan and COI formed the Company to operate the Purchased Facilities
and the Contributed Facilities (defined below) (together the
"Facilities"). The Company is owned equally by Magellan and COI.
- - Magellan contributed to the Company certain property and intangible
rights used in connection with the Facilities in exchange for its equity
interest in CBHS. The property that was contributed by Magellan
included five acute care psychiatric hospitals and other ancillary
facilities that Magellan leased from third parties (together the
"Contributed Facilities"). The Company also purchased certain assets
from Magellan relating to Magellan's information systems subsidiary for
$5 million.
- - CBHS entered into a service agreement with Magellan pursuant to which
the Company manages Magellan's interest in certain joint ventures with
unaffiliated third parties, including joint ventures that operate or
manage ten behavioral healthcare facilities. Magellan is the general
partner or managing entity of such joint ventures.
- - CBHS leased the Purchased Facilities from Crescent under a 12-year lease
(subject to renewal). CBHS pays annual base rent to Crescent, which is
initially $41.7 million and increases at 5% compounded annually (See
Note 2).
- - CBHS and certain of its subsidiaries entered into franchise agreements
with Magellan pursuant to which CBHS and such subsidiaries operate
using the "CHARTER" name, services and protocols and pay to Magellan
annual franchise fees, subject to increase, of approximately $78.3
million (See Note 7). The franchise fees due Magellan are subordinate
to the payment of rent due Crescent.
- - Both Magellan and COI contributed an additional $2.5 million in cash to
the capital of CBHS. In addition, each made a commitment to loan CBHS
up to $17.5 million each, for a period of 5 years. Such loans were made
to CBHS by each for $17.5 million ("Member Loans") and, effective
September 30, 1997, were converted to cumulative redeemable preferred
interests (See Note 8).
F-33
<PAGE> 67
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
NET REVENUE
Patient net revenue is based on established billing rates, less
estimated allowances for patients covered by Medicare and other contractual
reimbursement programs, and discounts from established billing rates. Amounts
received by the Company for treatment of patients covered by Medicare and other
contractual reimbursement programs, which may be based on cost of services
provided or predetermined rates, are generally less than the established
billing rates of the Company's hospitals. Final determination of amounts
earned under contractual reimbursement programs is subject to review and audit
by the applicable agencies. Management believes that adequate provision has
been made for any adjustments that may result from such reviews.
ADVERTISING COSTS
The production costs of advertising are expensed as incurred. The
Company does not consider any of its advertising costs to be direct-response
and, accordingly, does not capitalize such costs. Advertising costs consist
primarily of radio and television air time, which is amortized as utilized, and
printed media services. Advertising expense was approximately $6.4 million for
the 106 days ended September 30, 1997.
CHARITY CARE
The Company provides healthcare services without charge or at amounts
less than its established rates to patients who meet certain criteria under its
charity care policies. Because the Company does not pursue collection of
amounts determined to be charity care, they are not reported as revenue. For
the 106 days ended September 30, 1997, the Company provided, at its established
billing rates, approximately $5.3 million of such care.
INTEREST, NET
The Company records interest expense net of interest income. Interest
income for the 106 days ended September 30, 1997 was approximately $0.2
million.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid interest-bearing
investments with a maturity of three months or less when purchased, consisting
primarily of money market instruments.
CONCENTRATION OF CREDIT RISK
Accounts receivable from patient revenue subject the Company to a
concentration of credit risk with third party payors that include insurance
companies, managed healthcare organizations and governmental entities. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is
adequate to provide for normal credit losses.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for renewals
and improvements are charged to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the
respective assets are expensed as incurred. Amortization of capital lease
assets is included in depreciation expense. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which is
generally 10 to 30 years for buildings and improvements and three to ten years
for equipment. Depreciation expense was $0.7 million for the 106 days ended
September 30, 1997.
F-34
<PAGE> 68
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
INTANGIBLE ASSETS
Intangible assets are composed principally of goodwill and deferred
financing costs. Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net identifiable assets at the date of
acquisition and is amortized using the straight-line method over 25 years.
Deferred financing costs are the costs incurred by the Company to obtain its
revolving credit agreement (See Note 2), and are amortized over the term of the
related agreement (5 years).
The Company continually monitors events and changes in circumstances
that could indicate carrying amounts of intangible assets may not be
recoverable. When events or changes in circumstances are present that indicate
the carrying amount of intangible assets may not be recoverable, the Company
assesses the recoverability of intangible assets by determining whether the
carrying value of such intangible assets will be recovered through the future
cash flows expected from the use of the asset and its eventual disposition. No
impairment losses on intangible assets were recorded by the Company during the
106 days ended September 30, 1997.
2. LONG-TERM DEBT AND LEASE OBLIGATIONS
Information with regard to the Company's long-term debt and capital
lease obligations at September 30, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
1997
--------
<S> <C>
Revolving Credit Agreement due through 2002
(6.906% to 6.938%) ..................................... $ 65,000
10.5% Capital lease obligations due through 2007 ............. 915
--------
65,915
Less amounts due within one year ...................... 55
========
$ 65,860
========
</TABLE>
The aggregate scheduled maturities of long-term debt and capital lease
obligations during the five years subsequent to September 30, 1997 are as
follows (in thousands): 1998---$55; 1999---$62; 2000---$68; 2001---$76 and
2002---$65,084.
REVOLVING CREDIT AGREEMENTS
On June 17, 1997, the Company entered into a Credit Agreement (the
"Revolving Credit Agreement") with certain financial institutions for a five-
year senior secured revolving credit facility in an aggregate committed amount
of $100 million.
The maximum amount allowed to be borrowed under the Revolving Credit
Agreement is based on a working capital calculation. At September 30, 1997,
the Company had approximately $4.3 million available for borrowing under the
Revolving Credit Agreement. The Revolving Credit Agreement is secured by the
tangible and intangible personal property, including accounts receivable, owned
by the Company.
The loans outstanding under the Revolving Credit Agreement bear interest
(subject to certain potential adjustments) at a rate per annum equal to one,
two, three or six-month LIBOR plus 1.25% or the Alternative Base Rate ("ABR"),
as defined, plus .25%. Interest on ABR loans is payable at the end of each
fiscal quarter. Interest on LIBOR-based loans is payable at the end of their
respective terms, but a minimum of every three months.
COVENANTS
The Revolving Credit Agreement contains a number of restrictive
covenants, which, among other things, limit the ability of the Company and
certain of its subsidiaries to incur other indebtedness, engage in transactions
with affiliates, incur liens, make certain restricted payments, and enter into
certain business combinations.
F-35
<PAGE> 69
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
The Revolving Credit Agreement also requires the Company to maintain
certain specified financial ratios. The Company was in compliance with all debt
covenants under the Revolving Credit Agreement at September 30, 1997. Budget
projections prepared by management for the fiscal year ending September 30,
1998 estimate that the Company will be in compliance with all debt covenants
under the Revolving Credit Agreement during fiscal 1998. Management believes
that its budget projections for fiscal 1998 are reasonable and achievable,
however, there can be no assurances that such projections will be achieved. If
the Company were to fail to achieve such budget projections during fiscal 1998,
the Company could become in noncompliance with certain debt covenants resulting
in an event of default under the Revolving Credit Agreement.
CRESCENT LEASE
The Company leases the Purchased Facilities from Crescent under an
initial twelve year lease term with four renewal terms of five years each. The
lease requires the Company to pay all maintenance, property tax and insurance
costs.
The base rent for the first year of the initial term is $41.7 million
and increases at 5% compounded annually. The Company accounts for the Crescent
Lease as an operating lease and accordingly, records base rent expense on a
straight-line basis over the lease term. The Company is required to pay
Crescent in each lease year additional rent of $20.0 million, $10.0 million of
which must be used for capital expenditures each year and $10.0 million to pay
property taxes, insurance premiums and franchise fees. Such additional rent
amounts are included in the future minimum lease payments disclosed below.
OTHER LEASES
The Company also leases certain of its operating facilities, other than
the Purchased Facilities. The book value of capital leased assets was
approximately $4.5 million at September 30, 1997. The leases, which expire at
various dates through 2027, generally require the Company to pay all
maintenance, property tax and insurance costs.
At September 30, 1997, aggregate amounts of future minimum payments
under operating leases were as follows: 1998---$65.4 million; 1999---$66.4
million; 2000---$67.6 million; 2001---$69.5 million; 2002---$71.8 million;
subsequent to 2002---$556.0 million.
Rent expense for the 106 days ended September 30, 1997 was $20.4
million.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Salaries and wages $18,220
Property taxes ... 4,874
Interest ......... 333
Other ............ 10,151
-------
$33,578
=======
</TABLE>
F-36
<PAGE> 70
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
4. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the 106 days ended September 30,
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
106 DAYS ENDED
SEPTEMBER 30,
1997
--------------
<S> <C>
Interest paid ...................................................... $ 1,291
Non-cash transactions:
Exchange of debt for cumulative preferred interest - COI ......... 17,500
Exchange of debt for cumulative preferred interest - Magellan .... 17,500
Initial capital contribution from Magellan, primarily property and
equipment less assumed liabilities .......................... 5,282
Account receivable for the sale of facility ...................... 386
</TABLE>
5. DIVESTITURES
On September 30, 1997 the Company sold the operations of a 60 bed
behavioral healthcare hospital for $422,000. Proceeds from the sale were not
received until October 2, 1997. The transaction resulted in a gain of
$355,000.
6. BENEFITS PLANS
The Company has a defined contribution retirement plan (the "CBHS 401-K
Plan"). Employee participants can elect to voluntarily contribute up to 15% of
their compensation to the CBHS 401-K Plan. The Company will make contributions
to the CBHS 401-K Plan based on employee compensation and contributions. The
Company makes a discretionary contribution of 2% of each employee's
compensation and matches 50% of each employee's contribution up to 3% of their
compensation.
7. FRANCHISE FEES - MAGELLAN
The Company and certain of its subsidiaries entered into franchise
agreements with Magellan pursuant to which CBHS and such subsidiaries operate
using the "CHARTER" name, services and protocols. The franchise agreements
provide, among other things, that:
- - Magellan agrees to use its commercially reasonable best efforts, subject
to applicable law, to cause such subsidiaries to have "preferred
provider" status in connection with Magellan's managed behavioral
healthcare business on a basis substantially consistent with existing
agreements for such business.
- - Magellan agrees to operate or provide a toll free "800" telephone
number, and call center as a means of assisting customers to locate
the places of business of franchisees.
- - Franchisees were granted a right to a defined territory to engage in the
business of providing behavioral healthcare business, as defined.
- - Magellan will provide franchisees with the following assistance: (i)
advertising and marketing assistance including consultation, access to
media buying programs and access to broadcast and other advertising
materials produced by Magellan from time to time for franchisees; (ii)
risk management services, including risk financial planning, loss
control and claims management; (iii) outcomes monitoring; (iv) national
and regional contracting services; and (v) consultation by telephone or
at the Magellan offices with respect to matters relating to the
franchisee's business in which Magellan has expertise, including
reimbursement, government relations, clinical strategies, regulatory
matters, strategic planning and business development.
F-37
<PAGE> 71
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
Franchise fees payable by the Company are the greater of (i) $78.3
million, subject to increases for inflation; or (ii) $78.3 million, plus
3% of gross revenues over $1 billion and not exceeding $1.2 billion and
5% of gross revenues over $1.2 billion.
The initial term of the franchise agreements is 12 years with four
renewal terms of five years each.
8. CUMULATIVE REDEEMABLE PREFERRED INTEREST
Effective September 30, 1997, Magellan and COI each agreed to exchange
their respective Member Loans for cumulative redeemable preferred interest
("Preferred Interest") in the Company. The Preferred Interest is callable in
whole at the Company's option on or after April 1, 1998, at an amount equal to
the initial amount plus all accrued dividends thereon. Each holder of
Preferred Interest receives preferential allocation of the Company's profits
computed at 10% per annum on a cumulative basis, compounded monthly. In
addition, each Preferred Interest has a similar preferred position in the event
of dissolution of the Company.
9. COMMITMENTS AND CONTINGENCIES
The Company carries general and professional liability insurance from an
unrelated commercial insurance carrier with a self insured retention of $1.5
million per occurrence and $8.8 million in the aggregate, on a claims made
basis. In addition, the Company has an umbrella policy with coverage up to $125
million per occurrence and in the aggregate.
Certain of the Company's subsidiaries are subject to or parties to
claims, civil suits and governmental investigations and inquiries relating to
their operations and certain alleged business practices. In the opinion of
management, based on consultation with counsel, resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John C. Goff is the Chairman of CBHS and the Vice Chairman of both
Crescent and COI.
As part of the Crescent Transactions, (i) certain items of working
capital were purchased from Magellan and (ii) the Company agreed to collect
Magellan's patient accounts receivable outstanding as of the closing date for a
fee of 5% of cash collections. Included in net revenues for the 106 days ended
September 30, 1997 are approximately $5.0 million of collection fee revenues.
The Company has a receivable due from Magellan as of September
30, 1997 of approximately $5.1 million. This receivable results from (i)
amounts due for the management of Magellan's joint ventures, (ii) amounts due
for the collection fee on Magellan's patient account receivable and (iii)
receivable for the settlement of working capital related matters.
F-38
<PAGE> 72
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 398,138
Intercompany 1,115,570
Prepaid expenses and other current assets 7,789
-----------------
Total current assets 1,521,497
-----------------
INVESTMENTS 52,501,451
-----------------
TOTAL ASSETS $ 54,022,948
=================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,085,107
Accounts payable - CEI 899,638
Current portion of long term debt - CEI 13,725,000
Current portion of long term debt 15,000,000
-----------------
Total current liabilities 30,709,745
LONG-TERM DEBT, NET OF CURRENT PORTION 25,980,000
Total liabilities 56,689,745
-----------------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value,
10,000,000 share authorized, no
shares issued or outstanding --
Common stock, $.01 par value,
22,500,000 shares authorized,
11,211,094 shares outstanding 112,111
Additional paid-in capital 14,255,423
Deferred compensation on restricted shares (262,500)
Retained deficit (16,771,831)
-----------------
Total shareholders' equity (deficit) (2,666,797)
-----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 54,022,948
=================
</TABLE>
See accompanying notes to the condensed financial statements.
S-1
<PAGE> 73
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period from
May 9, 1997 to
December 31, 1997
-------------------
<S> <C>
COSTS AND EXPENSES
General and administrative expenses $ 1,764,978
Interest expense 2,783,669
Interest income (241,414)
Other income (110,252)
-------------------
Total costs and expenses 4,196,981
-------------------
INVESTMENT (INCOME) LOSS 12,574,850
-------------------
NET LOSS ($ 16,771,831)
===================
</TABLE>
See accompanying notes to the condensed financial statements.
S-2
<PAGE> 74
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period from
May 9, 1997 to
December 31, 1997
-------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,771,831)
Adjustments to reconcile net loss
to net cash provided by operating activities
Equity in loss of unconsolidated subsidiaries 19,573,533
Gain on sale of partnership (110,252)
Changes in assets and liabilities, net of
effects of acquisitions:
Intercompany (1,115,570)
Prepaid expenses and current assets (7,789)
Accounts payable and accrued expenses 1,084,107
Accounts payable - CEI 899,638
-------------------
Cash provided by operating activities 3,551,836
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of partnership 12,550,000
Cash paid for investments, net of cash received (82,174,732)
-------------------
Cash used in investing activities (69,624,732)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long term debt - CEI 58,657,515
Proceeds of long term debt 15,000,000
Payments on long term debt - CEI (18,952,515)
Capital contributions received 14,100,000
Dividends paid (2,380,000)
Cash received on stock options exercised 45,034
-------------------
Cash provided by financing activities 66,470,034
-------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 397,138
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,000
-------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 398,138
===================
</TABLE>
See accompanying notes to the condensed financial information.
S-3
<PAGE> 75
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Crescent Operating, Inc.'s (the "Company") investment in subsidiaries is
stated at cost plus equity in undistributed earnings of subsidiaries since
the date of acquisition. The Company's share of net income (loss) of its
unconsolidated subsidiaries is included in consolidated income (loss) using
the equity method. The parent company-only financial statements should be
read in conjunction with the Company's consolidated financial statements.
S-4
<PAGE> 76
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS - CBHS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- END
CLASSIFICATION OF PERIOD EXPENSE DESCRIBE DESCRIBE OF PERIOD
- ------------------------------------------ -------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
106 days ended September 30, 1997:
Allowance for doubtful accounts ...... -- 17,437 39 (A) 843 (B) 17,605
972 (C)
------------- -------------- -------------- -------------- --------------
$ -- $ 17,437 $ 1,011 $ 843 $ 17,605
============= ============== ============== ============== ==============
</TABLE>
- -------------------
(A) Recoveries of amounts previously charged to income.
(B) Accounts written off.
(C) Allowance for doubtful accounts assumed in purchase of net assets from
Magellan.
S-5
<PAGE> 77
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
------ -----------------------
3.1* First Amended and Restated Certificate of Incorporation
3.2* First Amended and Restated Bylaws
4.1* Specimen stock certificate
4.2* Preferred Share Purchase Rights Plan
10.1* Amended Stock Incentive Plan
10.2 Intercompany Agreement between Crescent Operating Inc. and
Crescent Real Estate Equities Limited Partnership (filed as
Exhibit 10.2 to the Quarterly report on Form 10-Q for the
Quarter Ended June 30, 1997 of Crescent Operating, Inc. and
incorporated herein by reference)
10.3 Amended and Restated Operating Agreement of Charter Behavioral
Health Systems, L.L.C. (filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Crescent Operating, Inc. for the
Quarter Ended June 30, 1997 and incorporated herein by
reference)
10.5** Amended and Restated Credit and Security Agreement, dated as
of May 30, 1997, between Crescent Real Estate Equities Limited
Partnership and Crescent Operating, Inc. together with related
Note
10.6** Line of Credit and Security Agreement, dated as of May 21,
1997, between Crescent Real Estate Equities Limited
Partnership and Crescent Operating, Inc. together with related
Line of Credit Note
10.7* Acquisition Agreement, dated as of February 10, 1997, between
Crescent Real Estate Equities Limited Partnership and
Carter-Crowley Properties, Inc.
10.10** Security Agreement dated September 22, 1997 between COI Hotel
Group, Inc., as debtor, and Crescent Real Estate Equities
Limited Partnership, as lender, together with related $1
million promissory note
10.11** Security Agreement dated September 22, 1997 between COI Hotel
Group, Inc., as debtor, and Crescent Real Estate Equities
Limited Partnership, as lender, together with related $800,000
promissory note
10.12** Amended and Restated Asset Management dated August 31, 1997,
to be effective July 31, 1997, between Wine Country Hotel, LLC
and The Varma Group, Inc.
10.13** Amended and Restated Asset Management Agreement dated August
31, 1997, to be effective July 31, 1997, between RoseStar
Southwest, LLC and The Varma Group, Inc.
10.14** Amended and Restated Asset Management Agreement dated August
31, 1997, to be effective July 31, 1997, between RoseStar
Management LLC and The Varma Group, Inc.
10.15** Agreement for Financial Services dated July 1, 1997, between
Crescent Real Estate Equities Company and Petroleum Financial,
Inc.
10.16** Credit Agreement dated August 27, 1997, between Crescent
Operating, Inc. and NationsBank of Texas, N.A. together with
related $15.0 million promissory note
10.17** Support Agreement dated August 27, 1997, between Richard E.
Rainwater, John Goff and Gerald Haddock in favor of Crescent
Real Estate Equities Company and NationsBank of Texas, N.A.
10.18 1997 Crescent Operating, Inc. Management Stock Incentive Plan
(filed herewith)
10.19 Memorandum of Agreement executed November 16, 1997, among
Charter Behavioral Health Systems, LLC, charter Behavioral
Health Systems, Inc. and Crescent Operating, Inc.
10.20 Purchase Agreement dated August 31, 1997, by and among Crescent
Operating, Inc. Rose Star Management LLC, Gerald W. Haddock,
John C. Goff and Sanjay Varma.
10.21 Stock Purchase Agreement dated August 31, 1997, by and among
Crescent Operating, Inc., Gerald W. Haddock, John C. Goff and
Sanjay Varma.
10.22 Amended and Restated Lease Agreement, dated June 30, 1995,
between Crescent Real Estate Equities Limited Partnership and
RoseStar Management L.L.C., relating to the Denver Marriott
City Center (filed as Exhibit 10.17 to the Annual Report on
Form 10-K of Crescent Real Estate Equities Company for the
Fiscal Year Ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference)
10.23 Lease Agreement, dated December 19, 1995 between Crescent Real
Estate Equities Limited Partnership and RoseStar Management
L.L.C., relating to the Hyatt Regency Albuquerque (filed as
Exhibit 10.16 to the 1995 10-K and incorporated herein by
reference)
10.24 Form of Amended and Restated Lease Agreement, dated January 1,
1996, among Crescent Real Estate Equities Limited Partnership,
Mogul Management, L.L.C. and RoseStar Management L.L.C.,
relating to the Hyatt Regency Beaver Creek (filed as Exhibit
10.12 to the 1995 10-K and incorporated herein by reference)
10.25 Lease Agreement, dated July 26, 1996, between Canyon Ranch,
Inc. and Canyon Ranch Leasing, L.L.C., assigned by Canyon
Ranch, Inc. to Crescent Real Estate Equities Limited
Partnership pursuant to the Assignment and Assumption Agreement
of Master Lease, dated July 26, 1996 (filed as Exhibit 10.24
to the Quarterly Report on Form 10-Q/A of Crescent Real Estate
Equities Company for the Quarter Ended June 30, 1997 (the
"1997 10-Q") and incorporated herein by reference)
10.26 Lease Agreement, dated November 18, 1996, between Crescent
Real Estate Equities Limited Partnership and Wine Country
Hotel, LLC (filed as Exhibit 10.25 to the Annual Report on
Form 10-K of Crescent Real Estate Equities Company for the
Fiscal Year Ended December 31, 1996 and incorporated herein by
reference)
10.27 Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P. and Vintage Resorts,
L.L.C., as assigned by Canyon Ranch-Bellefontaine Associates,
L.P. to Crescent Real Estate Funding VI, L.P. pursuant to the
Assignment and Assumption Agreement of Master Lease, dated
December 11, 1996 (filed as Exhibit 10.26 to the 1997 10-Q and
incorporated herein by reference)
10.28 Master Lease Agreement, dated June 16, 1997, between Crescent
Real Estate Funding VII, L.P. and Charger Behavioral Health
Systems, L.L.C. and its subsidiaries, relating to the
Facilities (filed as Exhibit 10.27 to the 1997 10-Q and
incorporated herein by reference)
10.29 Form of Indemnification Agreement
16 Letter of Arthur Anderson LLP regarding disclosure in
connection with change in certifying accountant (incorporated
by reference to the Company's current report on Form 8-K, dated
January 15, 1998)
21 List of Subsidiaries of Crescent Operating, Inc.
27 Financial Data Schedule
* Incorporated by Reference to the Company's registration
statement on Form S-1 dated July 12, 1997.
** Incorporated by Reference to the Company's September 30, 1997
Form 10-Q.
<PAGE> 1
EXHIBIT 10.18
1997 CRESCENT OPERATING, INC.
MANAGEMENT STOCK INCENTIVE PLAN
ARTICLE I
THE PLAN
1.1 NAME. This plan will be known as the "1997 Crescent Operating, Inc.
Management Stock Incentive Plan." Capitalized terms used herein are defined in
Article X hereof.
1.2 PURPOSE. The purpose of the Plan is to promote the growth and
general prosperity of the Company by permitting the Company and its Subsidiaries
to grant Options to their Employees, Outside Directors and Advisors and
Restricted Stock to their Employees and Advisors. The Plan is designed to help
the Company and its Subsidiaries attract and retain superior personnel for
positions of substantial responsibility and to provide Employees (including
officers), Outside Directors and Advisors with an additional incentive to
contribute to the success of the Company and its Subsidiaries. The Company
intends that Incentive Stock Options granted pursuant to Article IV will qualify
as "incentive stock options" within the meaning of Section 422 of the Code.
Subject to Article VII, Outside Directors of the Company may elect to receive
Common Stock in lieu of Director's Fees. With respect to Reporting Participants,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
that any provision of the Plan or action by the Board or the Committee fails to
so comply, it will be deemed null and void to the extent permitted by law and
deemed advisable by the Committee.
1.3 EFFECTIVE DATE. The Plan will become effective upon the Effective
Date.
1.4 ELIGIBILITY TO PARTICIPATE. Any Employee, Outside Director or
Advisor will be eligible to participate in the Plan; provided that Incentive
Stock Options may be granted only to persons who are Employees of the Company
and its Subsidiaries. The Board or the Committee may grant Options to Employees,
Outside Directors and Advisors in accordance with such determinations as the
Board or the Committee from time to time in its sole discretion may make.
1.5 MAXIMUM NUMBER OF SHARES OF COMMON STOCK SUBJECT TO AWARDS. The
shares of Common Stock subject to Awards pursuant to the Plan may be either
authorized and unissued shares or shares issued and thereafter acquired by the
Company. Subject to adjustment pursuant to the provisions of Section 8.2, and
subject to any additional restrictions elsewhere in the Plan, the maximum
aggregate number of shares of Common Stock that may be issued from time to time
pursuant to the Plan shall be one million (1,000,000) shares. The maximum number
of shares of Common Stock with respect to which Awards may be granted to any
Reporting Participant during any calendar year shall be five hundred thousand
(500,000) shares. The maximum number of shares of Common Stock which may be
subject to Incentive Stock Options during the life of the Plan shall be fifty
thousand (50,000) shares. If shares of Restricted Stock
<PAGE> 2
are reacquired by the Company pursuant to the provisions of Section 6.1 of the
Plan or if an Option expires or terminates for any reason without having been
exercised in full, the reacquired shares and/or the shares not purchased or
distributed will again be available for issuance under the Plan.
1.6 CONDITIONS PRECEDENT. The Company will not issue or deliver any
certificate for Plan Shares pursuant to the Plan prior to fulfillment of all of
the following conditions:
(a) The admission of the Plan Shares to listing on all stock
exchanges on which the Common Stock is then listed, unless the Board or the
Committee determines in its sole discretion that such listing is neither
necessary nor advisable;
(b) The completion of any registration or other qualification of
the sale of the Plan Shares under any federal or state law or under the
rulings or regulations of the Securities and Exchange Commission or any
other governmental regulatory body that the Board or the Committee in its
sole discretion deems necessary or advisable; and
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency that the Board or the Committee in its
sole discretion determines to be necessary or advisable.
1.7 RESERVATION OF SHARES OF COMMON STOCK. During the term of the Plan,
the Company will at all times reserve and keep available such number of shares
of Common Stock as may be necessary to satisfy the requirements of the Plan as
to the number of Plan Shares. In addition, the Company will from time to time,
as is necessary to accomplish the purposes of the Plan, use its best efforts to
obtain from any regulatory agency having jurisdiction any requisite authority
necessary to issue Plan Shares hereunder. The inability of the Company to obtain
from any regulatory agency having jurisdiction the authority deemed by the
Company's counsel to be necessary for the lawful issuance of any Plan Shares
will relieve the Company of any liability in respect of the nonissuance of Plan
Shares as to which the requisite authority has not been obtained.
1.8 TAX WITHHOLDING.
(a) Condition Precedent. The issuances of Plan Shares pursuant to
Awards under the Plan are subject to the condition that if at any time the
Board or the Committee determines, in its discretion, that the satisfaction
of withholding tax or other withholding liabilities under any federal,
state or local law is necessary or desirable as a condition of, or in
connection with such issuances, then the issuances will not be effective
unless the withholding has been effected or obtained in a manner acceptable
to the Board or the Committee. Each Option granted to a Reporting
Participant shall contain a provision in the related Option Agreement
making any required withholding tax or other withholding liability
mandatory, and specifying that the Company withhold a portion of the Plan
Shares as specified in clause (iv) of paragraph (b) below.
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(b) Manner of Satisfying Withholding Obligation. When a Participant
is required to pay to the Company an amount required to be withheld under
applicable income tax laws in connection with an Award, such payment may be
made (i) in cash, (ii) by check, (iii) by delivery to the Company of
shares of Common Stock already owned by the Participant having a Fair
Market Value on the date the amount of tax to be withheld is to be
determined (the "Tax Date") equal to the amount required to be withheld,
(iv) with respect to Options, through the withholding by the Company
("Company Withholding") of a portion of the Plan Shares acquired upon the
exercise of the Options (provided that, with respect to any Option held by
a Reporting Participant, at least six months has elapsed between the grant
of such Option and the exercise involving tax withholding) having a Fair
Market Value on the Tax Date equal to the amount required to be withheld or
(v) in any other form of valid consideration, as permitted by the Committee
in its discretion.
(c) Notice of Disposition of Stock Acquired Pursuant to Incentive
Stock Options. The Company may require as a condition to the issuance of
Plan Shares covered by any Incentive Stock Option that the party exercising
such Option give a written representation to the Company, which is
satisfactory in form and substance to its counsel and upon which the
Company may reasonably rely, that he will report to the Company any
disposition of such shares prior to the expiration of the holding periods
specified by Section 422(a)(1) of the Code. If and to the extent that the
realization of income in such a disposition imposes upon the Company
federal, state or local withholding tax requirements, or any such
withholding is required to secure for the Company an otherwise available
tax deduction, the Company will have the right to require that the
recipient remit to the Company an amount sufficient to satisfy those
requirements; and the Company may require as a condition to the issuance of
Plan Shares covered by an Incentive Stock Option that the party exercising
such Option give a satisfactory written representation promising to make
such a remittance.
1.9 ACCELERATION IN CERTAIN EVENTS. The Board or the Committee may
accelerate the exercisability of any Option or waive any restrictions with
respect to shares of Restricted Stock in whole or in part at any time.
Notwithstanding the provisions of any Option Agreement or Restricted Stock
Agreement, the following provisions will apply:
(a) Mergers and Reorganizations. If the Company or its shareholders
enter into an agreement to dispose of all or substantially all of the
assets of the Company by means of a sale, merger or other reorganization,
liquidation or otherwise in a transaction in which the Company is not the
surviving corporation, any Option will become immediately exercisable with
respect to the full number of shares subject to that Option and all
restrictions will lapse with respect to an Award of Restricted Stock during
the period commencing as of the date of the agreement to dispose of all or
substantially all of the assets of the Company and ending when the
disposition of assets contemplated by that agreement is consummated or the
Award is otherwise terminated in accordance with its provisions or the
provisions of the Plan, whichever occurs first; provided that no Reporting
Participant may exercise an Option and no restrictions will lapse with
respect to an
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Award of Restricted Stock to a Reporting Participant unless at least six
months have elapsed since the grant of such Option or Award; provided,
further, that no Option will be immediately exercisable and no restrictions
will lapse with respect to an Award of Restricted Stock under this Section
on account of any agreement of merger or other reorganization when the
shareholders of the Company immediately before the consummation of the
transaction will own at least fifty percent of the total combined voting
power of all classes of stock entitled to vote of the surviving entity
immediately after the consummation of the transaction. An Option will not
become immediately exercisable and no restrictions will lapse with respect
to an Award of Restricted Stock if the transaction contemplated in the
agreement is a merger or reorganization in which the Company will survive.
(b) Change in Control. In the event of a change in control or
threatened change in control of the Company, all Options granted prior to
the change in control or threatened change in control will become
immediately exercisable, and all restrictions will lapse with respect to
awards of Restricted Stock granted prior to the change in control or
threatened change in control, provided that no Reporting Participant may
exercise an Option and no restriction will lapse with respect to an Award
of Restricted Stock to a Reporting Participant unless at least six months
have elapsed since the grant of such Option or Award. The term "change in
control" for purposes of this Section refers to the acquisition of 15% or
more of the voting securities of the Company by any person or by persons
acting as a group within the meaning of Section 13(d)(3) of the Exchange
Act (other than an acquisition by (i) a person or group meeting the
requirements of clauses (i) and (ii) of Rule 13d-l(b)(1) promulgated under
the Exchange Act, (ii) or any employee pension benefit plan (within the
meaning of Section 3(2) of ERISA) of the Company or of its Subsidiaries,
including a trust established pursuant to such plan); provided that no
change in control or threatened change in control will be deemed to have
occurred (i) if prior to the acquisition of, or offer to acquire, 15% or
more of the voting securities of the Company, the full Board has adopted by
not less than two-thirds vote a resolution specifically approving such
acquisition or offer or (ii) from (A) a transfer of the Company's voting
securities by Richard E. Rainwater ("Rainwater") to (i) a member of
Rainwater's immediate family (within the meaning of Rule 16a-1(e) of the
Exchange Act) either during Rainwater's lifetime or by will or the laws of
descent and distribution; (ii) any trust as to which Rainwater or a member
(or members) of his immediate family (within the meaning of Rule 16a-1(e)
of the Exchange Act) is the beneficiary; (iii) any trust as to which
Rainwater is the settlor with sole power to revoke; (iv) any entity over
which Rainwater has the power, directly or indirectly, to direct or cause
the direction of the management and policies of the entity, whether through
the ownership of voting securities, by contract or otherwise; or (v) any
charitable trust, foundation or corporation under Section 501(c)(3) of the
Code that is funded by Rainwater; or (B) the acquisition of voting
securities of the Corporation by either (i) Rainwater or (ii) a person,
trust or other entity described in the foregoing clauses (A)(i)-(v) of this
subsection. The term "person" for purposes of this Section refers to an
individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form
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of entity not specifically listed herein. Whether a change in control is
threatened will be determined solely by the Committee.
1.10 COMPLIANCE WITH SECURITIES LAWS. Plan Shares will not be issued with
respect to any Award unless the issuance and delivery of the Plan Shares (and
the exercise of an Option, if applicable) complies with all relevant provisions
of federal and state law, including without limitation the Securities Act, the
rules and regulations promulgated thereunder and the requirements of any stock
exchange upon which the Plan Shares may then be listed, and will be further
subject to the approval of counsel for the Company with respect to such
compliance. The Board or the Committee may also require a Participant to furnish
evidence satisfactory to the Company, including, without limitation, a written
and signed representation letter and consent to be bound by any transfer
restrictions imposed by law, legend, condition or otherwise, and a
representation that the Plan Shares are being acquired only for investment and
without any present intention to sell or distribute the shares in violation of
any federal or state law, rule or regulation. Further, each Participant will
consent to the imposition of a legend on the certificate representing the Plan
Shares issued pursuant to an Award restricting their transferability as required
by law or by this Section.
1.11 EMPLOYMENT OF PARTICIPANT. Nothing in the Plan or in any Award
granted hereunder will confer upon any Participant any right to continued
employment by the Company or any of its Subsidiaries or to continued service as
a Director or Advisor or limit in any way the right of the Company or any
Subsidiary at any time to terminate or alter the terms of that employment or
services as a Director or Advisor.
1.12 INFORMATION TO PARTICIPANTS. The Company will furnish to each
Participant copies of annual reports, proxy statements and all other reports
sent to the Company's shareholders. Upon written request, the Company will
furnish to each Participant a copy of its most recent Annual Report on Form 10-K
and each quarterly report to shareholders issued since the end of the Company's
most recent fiscal year.
ARTICLE II
ADMINISTRATION
2.1 COMMITTEE. The Plan will be administered by the Board or by a
Committee of not fewer than two directors appointed by the Board. As used
herein, if the Company has any class of common equity securities required to be
registered under Section 12 of the Exchange Act, as to any Award to a Covered
Employee, "Committee" shall mean a committee consisting of two or more
Directors, each of whom shall be an "outside director" as defined in Section
162(m) of the Code. Subject to the provisions of the Plan, the Board or
Committee will have the sole discretion and authority to determine from time to
time the Employees and Advisors to whom Awards will be granted and the number of
Plan Shares subject to each Award, to interpret the Plan, to prescribe, amend
and rescind any rules and regulations necessary or appropriate for the
administration of the Plan, to determine and interpret the details and
provisions of each Option Agreement and Restricted Stock Agreement, to modify or
amend any Option Agreement or Restricted Stock Agreement or waive any conditions
or restrictions applicable to any Option (or the
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exercise thereof) or to any shares of Restricted Stock, and to make all other
determinations or advisable for the administration of the Plan. The Committee
shall be solely responsible for the grant and administration of Awards to
Covered Employees. With respect to any provision of the Plan granting the Board
or the Committee the right to agree, in its sole discretion, to further extend
the term of any Award hereunder, the Board or the Committee may exercise such
right at the time of grant, in the Option Agreement relating to such Award, or
at any time or from time-to-time after the grant of any Award hereunder.
2.2 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. A majority of the members
of the Board or the Committee will constitute a quorum, and any action taken by
a majority present at a meeting at which a quorum is present or any action taken
without a meeting evidenced by a writing executed by all members of the Board or
the Committee will constitute the action of the Board or the Committee. Meetings
of the Committee may take place by telephone conference call.
2.3 COMPANY ASSISTANCE. The Company will supply full and timely
information to the Board or the Committee on all matters relating to Employees,
Outside Directors and Advisors, their employment, death, Retirement, Disability
or other termination of employment, and such other pertinent facts as the Board
or the Committee may require. The Company will furnish the Board or the
Committee with such clerical and other assistance as is necessary to the
performance of its duties.
ARTICLE III
OPTIONS
3.1 METHOD OF EXERCISE. Each Option will be exercisable at any time and
from time in whole or in part in accordance with the terms of the Option
Agreement pursuant to which the Option was granted. No Option may be exercised
for a fraction of a Plan Share.
3.2 PAYMENT OF PURCHASE PRICE. The purchase price of any Plan Shares
purchased will be paid at the time of exercise of the Option either (i) in cash,
(ii) by certified or cashier's check, (iii) by shares of Common Stock, if
permitted by the Committee, (iv) as to Outside Directors, by cash or certified
or cashier's check for the par value of the Plan Shares plus a recourse
promissory note for the balance of the purchase price, such note to provide for
the right to repay the note partially or wholly with Common Stock and with an
interest rate based on the current dividend yield of the Common Stock, (v) as to
Employees and Advisors, by cash or certified or cashier's check for the par
value of the Plan Shares plus a promissory note for the balance of the purchase
price, which note will contain such terms and provisions as the Board or the
Committee may approve, including without limitation the right to repay the note
partially or wholly with Common Stock and to base the interest rate on the
current dividend yield of the Common Stock, (vi) by delivery of a copy of
irrevocable instructions from the Optionee to a broker or dealer, reasonably
acceptable to the Company, to sell certain of the Plan Shares upon exercise of
the Option or to pledge them as collateral for a loan and promptly deliver to
the Company the amount of sale or loan proceeds necessary to pay such purchase
price or (vii) as to Employees and Advisors, in any other form of valid
consideration, as permitted by the Board or the Committee in its
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discretion. If any portion of the purchase price or a note given at the time of
exercise is paid in shares of Common Stock, those shares will be valued at the
then Fair Market Value.
3.3 WRITTEN NOTICE REQUIRED. Any Option will be deemed to be exercised
for purposes of the Plan when written notice of exercise has been received by
the Company at its principal office from the person entitled to exercise the
Option and payment for the Plan Shares with respect to which the Option is
exercised has been received by the Company in accordance with Section 3.2.
3.4 RIGHTS OF OPTIONEES UPON TERMINATION OF EMPLOYMENT OR SERVICE.
(a) In the event an Optionee ceases to be an Employee and Advisor,
and does not continue to be a Director, for any reason other than death,
Retirement, Disability or for Cause, (i) the Board or the Committee shall
have the ability to accelerate the vesting of the Optionee's Option in its
sole discretion, and (ii) such Optionee's Option shall be exercisable (to
the extent exercisable on the date of termination of employment or service
as an Employee or Advisor, or, if the Committee, in its discretion, has
accelerated the vesting of such Option, to the extent exercisable following
such acceleration) (a) if such Option is an Incentive Stock Option, at any
time within three months after the date of termination of employment with
the Company or any Subsidiary, unless by its terms the Option expires
earlier; or (b) if such Option is a Nonqualified Stock Option, at any time
within one year after the date of termination of employment or service as
an Employee or Advisor, unless by its terms the Option expires earlier or
unless the Committee agrees, in its sole discretion, to further extend the
term of such Nonqualified Stock Option; provided that the term of any such
Nonqualified Stock Option shall not be extended beyond its initial term. An
Employee or Advisor who continues to be a Director shall not be deemed to
have terminated employment or service as to any Nonqualified Stock Option
(b) In addition, unless the Board or the Committee agrees, in its
sole discretion, to extend the term of a Nonqualified Stock Option granted
to an Employee or Advisor (provided that the term of any such Option shall
not be extended beyond its initial term), an Optionee's Option may be
exercised as follows in the event such Optionee ceases to serve as an
Employee, Outside Director or Advisor due to death, Disability, Retirement
or for Cause:
(i) Death. If an Optionee dies while serving as an Employee,
Outside Director or Advisor, or within three months after
ceasing to be an Employee, Outside Director or Advisor, his
option shall become fully exercisable on the date of his death
and shall expire 12 months thereafter, unless by its terms it
expires sooner. During such period, the Option may be fully
exercised, to the extent that it remains unexercised on the date
of death, by the Optionee's personal representative or by the
distributees to whom the Optionee's rights under the Option
shall pass by will or by the laws of descent and distribution.
(ii) Retirement. If an Optionee ceases to serve as an
Employee, Outside Director or Advisor as a result of Retirement,
his Option shall become fully exercisable on the date of his
Retirement and (a) if such Option is an Incentive Stock Option,
such Option will be exercisable at any time within three months
after the effective date of such
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Retirement, unless by its terms the Option expires earlier, and (b) if
such Option is a Nonqualified Stock Option, such Option will be
exercisable at any time within one year after the effective date of
such Retirement, unless by its terms the Option expires sooner.
(iii) Disability. If an Optionee ceases to serve as an
Employee, Outside Director or Advisor as a result of Disability, the
Optionee's Option shall become fully exercisable and shall expire 12
months thereafter, unless by its terms it expires sooner.
(iv) Cause. If an Optionee ceases to serve as an Employee,
Outside Director or Advisor, because the Optionee is terminated for
Cause, the Optionee's Option shall automatically expire. If any facts
that would constitute Cause for termination or removal of an Employee
or Advisor are discovered after the Optionee's relationship with the
Company has ended, any Options then held by the Optionee may be
immediately terminated by the Committee. Notwithstanding the
foregoing, if an Optionee is an Employee employed pursuant to a
written employment agreement, or is an Advisor retained pursuant to a
written agreement, the Optionee's relationship with the Company will
be deemed terminated for 'Cause' for purposes of the Plan only if the
Optionee is considered under the circumstances to have been terminated
for cause for purposes of such written agreement.
3.5 TRANSFERABILITY OF OPTIONS. Options shall not be transferable other
than pursuant to a qualified domestic relations order, by will or by the laws of
descent and distribution and, with respect to an Incentive Stock Option, may be
exercised during the lifetime of an Optionee only by that Optionee or by his
legally authorized representative.
3.6 OPTIONS SUBJECT TO SHAREHOLDERS APPROVAL. Options granted to Covered
Employees and Incentive Stock Options granted prior to the date on which
shareholder approval of the Plan is obtained shall be subject to and conditioned
upon shareholder approval of the Plan in accordance with Section 162(m) and 422
of the Code.
ARTICLE IV
INCENTIVE STOCK OPTIONS
4.1 OPTION TERMS AND CONDITIONS. The terms and conditions of Options
granted under this Article may differ from one another as the Board or the
Committee may, in its discretion, determine, as long as all Options granted
under this Article satisfy the requirements of this Article.
4.2 DURATION OF OPTIONS. Each Option granted under this Article will
expire on the date determined by the Board or Committee, but in no event will
any Option granted under this Article expire earlier than one year or later than
ten years after the date on which the Option is granted. In addition, each
Option will be subject to early termination as provided elsewhere in the Plan.
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4.3 PURCHASE PRICE. The purchase price for Plan Shares acquired pursuant
to the exercise, in whole or in part, of any Option granted under this Article
will not be less than the Fair Market Value of the Plan Shares at the time of
the grant of the Option.
4.4 MAXIMUM AMOUNT OF OPTIONS FIRST EXERCISABLE IN ANY CALENDAR YEAR.
The maximum aggregate Fair Market Value of Plan Shares (determined at the time
the Option is granted) with respect to which Options issued under this Article
are exercisable for the first time by any Employee during any calendar year
under all incentive stock option plans of the Company and its Subsidiaries and
affiliates may not exceed $100,000. Any portion of an Option granted under the
Plan and first exercisable in excess of the foregoing limitations will be
considered granted under Article V.
4.5 REQUIREMENTS AS TO CERTAIN OPTIONS. In the event of the grant of any
Option to an individual who, at the time the Option is granted, owns shares of
stock possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or any of its Subsidiaries or affiliates within
the meaning of Section 422 of the Code, the purchase price for the Plan Shares
subject to that Option must be at least 110% of the Fair Market Value of those
Plan Shares at the time the Option is granted, and the Option must not be
exercisable after the expiration of five years from the date of its grant.
4.6 INDIVIDUAL OPTION AGREEMENTS. Each Employee receiving Options under
this Article will be required to enter into a written Option Agreement with the
Company. In such Option Agreement, the Employee will agree to be bound by the
terms and conditions of the Plan and such other matters as the Committee deems
appropriate.
ARTICLE V
NONQUALIFIED STOCK OPTIONS
5.1 OPTION TERMS AND CONDITIONS. The terms and conditions of Options
granted under this Article may differ from one another as the Board or Committee
may, in its discretion, determine, as long as all Options granted under this
Article satisfy the requirements of this Article.
5.2 DURATION OF OPTIONS. Each Option granted to an Employee, Outside
Director or Advisor under this Article and all rights thereunder will expire on
the date determined by the Board or Committee, but in no event will any Option
granted under this Article expire later than ten years after the date on which
the Option is granted. In addition, each Option will be subject to early
termination as provided elsewhere in the Plan.
5.3 PURCHASE PRICE. The purchase price for Plan Shares acquired pursuant
to the exercise, in whole or in part, of any Option granted under this Article
shall be not less than the Fair Market Value of the Plan Shares at the time of
the grant of the Option.
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5.4 INDIVIDUAL OPTION AGREEMENTS. Each Employee, Outside Director or
Advisor receiving Options under this Article will be required to enter into a
written Option Agreement with the Company. In such Option Agreement, the
Employee, Outside Director or Advisor will agree to be bound by the terms and
conditions of the Plan and such other matters as the Board or Committee deems
appropriate.
ARTICLE VI
RESTRICTED STOCK
6.1 TERMS AND CONDITIONS. Each Restricted Stock Grant confers upon the
recipient thereof the right to receive a specified number of shares of Common
Stock of the Company in accordance with the terms and conditions of each
Participant's individual written agreement as set forth in Section 6.2. The
general terms and conditions of the Restricted Stock awards shall be as follows:
(a) Any shares of Common Stock awarded hereunder to a Participant
shall be restricted for a period of time to be determined by the Committee
for each participant at the time of the Award, which period shall be not
less than one year or more than ten years. The restrictions shall prohibit
the sale, assignment, transfer, pledge or other encumbrance of such shares,
and will provide for possible reversion thereof to the Company in
accordance with subparagraph (b) during the period of restriction.
(b) All Restricted Stock awarded under this Plan to a Participant
shall be forfeited and returned to the Company in the event the Participant
ceases to be employed by, serve as a Director of, or serve as an Advisor to
the Company, one of its Subsidiaries, or any Affiliated Company prior to
the expiration of the period of restriction, unless the Participant's
termination of employment is due to his or her death, Disability or
Retirement. An Employee or Advisor who continues to be a Director shall not
be deemed to have terminated employment or service.
(c) In the event of a Participant's death or Disability, the
restrictions under subparagraph (a) will lapse with respect to all
Restricted Stock awarded to the Participant under this Plan prior to any
such event, and the shares of Common Stock involved shall cease to be
Restricted Stock within the meaning of this Plan and shall no longer be
subject to forfeiture to the Company pursuant to subparagraph (b).
(d) In the event of a Participant's Retirement, the restrictions
under subparagraph (a) shall continue to apply unless the Board or the
Committee in its discretion shall shorten the restriction period.
(e) Stock certificates issued with respect to awards of Restricted
Stock made under this Plan shall be registered in the name of the
Participant, but shall be delivered by him or her to the Company together
with a stock power endorsed in blank. Each such certificate shall bear the
following legend:
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"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
FORFEITURE, RESTRICTIONS ON TRANSFER AND CERTAIN OTHER TERMS AND
CONDITIONS SET FORTH IN THE 1997 CRESCENT OPERATING, INC.
MANAGEMENT STOCK INCENTIVE PLAN AND THE AGREEMENT BETWEEN THE
REGISTERED OWNER OF THE SHARES REPRESENTED BY THIS CERTIFICATE
AND CRESCENT OPERATING, INC. ENTERED INTO PURSUANT TO SUCH PLAN."
(f) Upon the lapse of a restriction period as determined pursuant to
subparagraph (a), the Company will return the stock certificates
representing the shares with respect to which the restriction has lapsed to
the Participant or his or her legal representative, and pursuant to the
instruction of the Participant or his or her legal representative will
issue a certificate for such shares which does not bear the legend set
forth in subparagraph (e).
(g) Any other securities or assets (other than ordinary cash
dividends) which are received by a Participant with respect to Restricted
Stock awarded to him, which is still subject to restrictions provided for
in subparagraph (a), will be subject to the same restrictions and shall be
delivered by the Participant to the Company as provided in subparagraph
(e).
(h) From the time of grant of the Restricted Stock Award, the
Participant shall be entitled to exercise all rights attributable to the
Restricted Stock, subject to forfeiture of such rights and the stock as
provided in subparagraph (b).
6.2 INDIVIDUAL AGREEMENTS. Each Participant receiving an Award of
Restricted Stock under this Article will be required to enter into a written
Restricted Stock Agreement with the Company. In such Restricted Stock Agreement,
the Participant will agree to be bound by the terms and conditions of the Plan
and such other matters as the Board or the Committee deems appropriate.
ARTICLE VII
OUTSIDE DIRECTOR STOCK-FOR-FEES ELECTIONS
7.1 OUTSIDE DIRECTOR STOCK-FOR-FEES ELECTION. Each Outside Director of the
Company shall be permitted to receive Director's Fees in the form of Common
Stock rather than cash in accordance with the following provisions:
(a) Each Outside Director shall have the right to elect to receive
one-half or all of such Outside Director's Fees in the form of Common Stock
rather than cash by tendering an irrevocable written election to the
Secretary of the Company pursuant to which all Director's Fees otherwise
payable to the Outside Director shall be paid in the form of
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Common Stock as provided in (b) below. Such election shall become effective
six (6) months after its delivery to the Secretary of the Company by the
Outside Director. Such election shall remain in effect until the earlier of
(i) the date six (6) months after such Outside Director shall have
delivered to the Secretary of the Company irrevocable written notice that
his or her election to receive Common Stock shall cease as of the date six
months following delivery of the notice, or (ii) the date on which such
Outside Director terminates as a member of the Board of Directors by reason
of resignation, non-reelection, death, or disability. Any Outside Director
who having terminated an election to receive Common Stock or having failed
to elect to receive Common Stock rather than cash may elect to receive
Director's Fees in the form of Common Stock as of the date six (6) months
following delivery of irrevocable written notice of such election to the
Secretary of the Company. An Outside Director who does not elect to have
Director's Fees paid in Common Stock shall receive his or her remuneration
in cash at such times that such remuneration is otherwise due.
(b) If an Outside Director elects to receive payment of Director's
Fees in the form of Common Stock, such Common Stock shall be issued as soon
as practicable after the annual meeting of shareholders or meeting of the
Board or Committee of the Board to which such remuneration relates. The
number of shares of Common Stock to be issued to such Outside Director
shall be determined by dividing:
(i) the remuneration otherwise payable to the Outside Director,
by
(ii) ninety percent (90%) of the Fair Market Value of the
Company's Common Stock on the determination date on the rounding up or
down of any fractional share to the nearest whole share.
The determination date shall be the date that the relevant payment of
Director's Fees is payable.
(c) Shares of Common Stock issued under this Article VII shall be
free of any restrictions except for restrictions applicable under the
Exchange Act.
7.2 INCOME TAX. Each Outside Director who elects to receive Director's
Fees in the form of Common Stock rather than cash shall be responsible for
payment of federal, state, and local income taxes on the Fair Market Value of
such Common Stock.
ARTICLE VIII
TERMINATION, AMENDMENT AND ADJUSTMENT
8.1 TERMINATION AND AMENDMENT. The Plan will terminate on August__, 2007.
No Awards will be granted under the Plan after that date of termination,
although Awards granted prior to such date shall remain outstanding in
accordance with their terms. Subject to the limitations contained in this
Section 8.1, the Board or the Committee may at any time amend or revise the
terms of the Plan, including the form and substance of the Option Agreements and
Restricted Stock Agreements to be used in connection herewith; provided that,
without shareholder
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approval, no amendment or revision may (i) increase the maximum aggregate number
of Plan Shares, except as permitted Section 8.2, (ii) change the minimum
purchase price for shares under Article IV or Article V or (iii) permit the
granting of an Award to anyone other than as provided in the Plan. No amendment,
suspension or termination of the Plan may, without the consent of the Optionee
who has received an Award hereunder, alter or impair any of that Participant's
rights or obligations under any Award granted under the Plan prior to that
amendment, suspension or termination.
8.2 ADJUSTMENT. If the outstanding Common Stock is increased, decreased,
changed into or exchanged for a different number or kind of shares or securities
through merger, consolidation, combination, exchange of shares, other
reorganization, recapitalization, reclassification, stock dividend, stock split
or reverse stock split, an appropriate and proportionate adjustment will be made
in the maximum number and kind of Plan Shares as to which Awards may be granted
under the Plan. A corresponding adjustment will be made in the number or kind of
shares allocated to and purchasable under unexercised Options or shares of
Restricted Stock with respect to which restrictions have not yet lapsed prior to
any such change. Any such adjustment in outstanding Options will be made without
change in the aggregate purchase price applicable to the unexercised portion of
the Option, but with a corresponding adjustment in the price for each share
purchasable under the Option. Any new or additional or different class of
securities that are distributed to a Participant in his capacity as the owner of
Restricted Stock as granted hereunder shall be considered to be Restricted Stock
and shall be subject to all of the conditions and restrictions provided herein
applicable to Restricted Stock. The foregoing adjustments and the manner of
application of the foregoing provisions will be determined solely by the Board
or the Committee, and any such adjustment may provide for the elimination of
fractional share interests.
ARTICLE IX
MISCELLANEOUS
9.1 OTHER COMPENSATION PLANS. The adoption of the Plan will not affect
any other stock option or incentive or other compensation plans in effect for
the Company or any of its Subsidiaries, nor will the Plan preclude the Company
or any of its Subsidiaries, from establishing any other forms of incentive or
other compensation for Employees.
9.2 PLAN BINDING ON SUCCESSORS. The Plan will be binding upon the
successors and assigns of the Company and any of its Subsidiaries that adopt the
Plan.
9.3 NUMBER AND GENDER. Whenever used herein, nouns in the singular will
include the plural where appropriate, and the masculine pronoun will include the
feminine gender.
9.4 HEADINGS. Headings of articles and sections hereof are inserted for
convenience of reference and constitute no part of the Plan.
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<PAGE> 14
ARTICLE X
DEFINITIONS
As used herein with initial capital letters, the following terms have the
meanings set forth unless the context clearly indicates to the contrary:
10.1 "Advisor" means any person performing advisory or consulting services
for the Company or Subsidiary of the Company, with or without compensation, to
whom the Company chooses to grant Options in accordance with the Plan, provided
that bona fide services must be rendered by such person and such services shall
not be rendered in connection with the offer or sale of securities in a capital
raising transaction.
10.2 "Award" means a grant of Options under Articles IV and V of the Plan
or an Award of Restricted Stock under Article VI of the Plan.
10.3 "Board" means the Board of Directors of the Company, provided that, if
the Board delegates all or any part of its authority to a committee composed of
one or more directors, then the term "Board" shall be deemed to refer to such
committee to the extent of such delegation.
10.4 "Cause" will mean an act or acts involving a felony, fraud, willful
misconduct, commission of any act that causes or reasonably may be expected to
cause substantial injury to the Company or other good cause. The term "other
good cause" as used in this Section will include, but shall not be limited to,
habitual impertinence, a pattern of conduct that tends to hold the Company up to
ridicule in the community, conduct disloyal to the Company, conviction of any
crime of moral turpitude and substantial dependence, as judged by the Committee,
on alcohol or any controlled substance. "Controlled substance" means a drug,
immediate precursor or other substance listed in Schedules I-V of the Federal
Comprehensive Drug Abuse Prevention Control Act of 1970, as amended.
10.5 "Code" means the Internal Revenue Code of 1986, as amended.
10.6 "Committee" shall have the meaning set forth in Section 2.1.
10.7 "Common Stock" means the Common Stock, par value $.01 per share, of
the Company or, in the event that the outstanding shares of such Common Stock
are hereafter changed into or exchanged for shares of a different stock or
security of the Company or some other corporation, such other stock or security.
10.8 "Company" means Crescent Operating, Inc., a Delaware corporation.
10.9 "Covered Employee" means any individual who is the chief executive
officer or is acting in such capacity, or is among the four highest compensated
officers (other than the chief executive officer) of the Company or of any
Subsidiary.
10.10 "Director" means a member of the Board of Directors of the Company.
-14-
<PAGE> 15
10.11 "Director's Fees" means the remuneration otherwise payable to an
Outside Director of the Company as an annual retainer and for attending meetings
of the Board and meetings of the committees of the Board.
10.12 "Disability" of a Participant shall be deemed to occur whenever a
Participant is rendered unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuing period of not less than 12 months.
10.13 "Effective Date" means August__, 1997.
10.14 "Employee" means an employee (as defined under Section 3401(c) of the
Code and the regulations thereunder) of the Company (including an officer), or
an officer or other employee of any of the Subsidiaries of the Company.
10.15 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
10.16 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
10.17 "Fair Market Value" means such value as will be determined by the
Board or the Committee on the basis of such factors as it deems appropriate;
provided that if the Common Stock is traded on a national securities exchange,
such value will be determined by the Board or the Committee on the basis of the
closing price for the Common Stock on the date for which such determination is
relevant, as reported on the exchange and further provided that if there should
be no sales on such date, such value shall be deemed equal to the closing price
on the last preceding date on which sales of Common Stock were reported. If the
Common Stock is traded on more than one exchange, such value will be determined
on the basis of the exchange trading the greatest volume of shares on such date.
In no event shall "Fair Market Value" be less than the par value of the Common
Stock.
10.18 "Incentive Stock Option" means an Option granted under Article IV.
10.19 "Nonqualified Stock Option" means an Option granted under Article V.
10.20 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option granted under the Plan.
10.21 "Option Agreement" means an agreement between the Company and a
Participant with respect to one or more Options.
10.22 "Outside Director" means a Director who is not an Employee of the
Company or of any Subsidiary.
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<PAGE> 16
10.23 "Participant" means an Employee, Director or Advisor to whom an Award
has been granted hereunder.
10.24 "Plan" means the 1997 Crescent Operating, Inc. Management Stock
Incentive Plan, as amended from time to time.
10.25 "Plan Shares" means shares of Common Stock issuable pursuant to the
Plan.
10.26 "Restricted Stock" means an Award of Common Stock granted under
Article VI.
10.27 "Restricted Stock Agreement" means an agreement between the Company
and a Participant with respect to an Award of Restricted Stock.
10.28 "Retirement" means termination of employment or service as a Director
on or after the date on which a Participant attains age 70.
10.29 "Securities Act" means the Securities Act of 1933, as amended.
10.30 "Subsidiary" means a subsidiary corporation of the Company, as
defined in Section 424(f) of the Code.
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<PAGE> 1
EXHIBIT 10.19
MEMORANDUM OF AGREEMENT
THIS MEMORANDUM OF AGREEMENT executed on November 16, 1997, to be
effective as of September 30, 1997, by and among CHARTER BEHAVIORAL HEALTH
SYSTEMS, LLC, a Delaware limited liability company (the "Company"), CHARTER
BEHAVIORAL HEALTH SYSTEMS, INC., a Delaware corporation ("Charter, Inc."), and
CRESCENT OPERATING, INC., a Delaware corporation ("COI"; Charter Inc. and COI
being herein referred to individually as a "Member" and together as the
"Members").
BACKGROUND
A. Charter Inc. and COI are the sole members of the Company and are parties,
together with Magellan Health Services, Inc., to a certain Amended and Restated
Operating Agreement of Charter Behavioral Health Systems, LLC, dated as of June
16, 1997 (the "Operating Agreement").
B. Charter Inc. is the holder of loans previously made by CCM, Inc., an
affiliate of Charter, Inc., to the Company pursuant to the Operating Agreement
aggregating $17,500,000 (the "Charter Inc. Loans") as evidenced by those two
certain Promissory Notes in the principal sums of $10,000,000 and $7,500,000
dated August 1, 1997 and September 2, 1997, respectively (collectively, the
"Charter Inc. Notes").
C. COI has previously made to the Company pursuant to the Operating Agreement
loans aggregating $17,500,000 (the "COI Loans"; the Charter Inc. Loans and COI
Loans being herein collectively referred to as the "Member Loans") as evidenced
by those two certain Promissory Notes in the principal sums of $10,000,000 and
$7,500,000 dated August 1, 1997 and September 2, 1997, respectively
(collectively, the "COI Notes"; the Charter Inc. Notes and the COI Notes being
herein collectively referred to as the "Member Notes").
D. Charter Inc. and COI have each agreed to exchange its respective Member
Loans and Member Notes for a cumulative redeemable preferred interest in the
Company more particularly described in this Memorandum of Agreement on the
terms, and subject to the conditions, herein set forth, such exchange being
made effective for all purposes as of September 30, 1997 (herein the
"Exchange").
Accordingly, in order to give effect to the Exchange, the parties hereto agree
as follows:
1. Exchange. Each of Charter Inc. and COI hereby exchanges the aggregate
principal amount of its Member Loans and its Member Notes for the Cumulative
Redeemable Preferred Interests in the Company more particularly described in
paragraph 2 below. Upon request by the Company, each of Charter Inc. and COI
agrees to surrender to the Company its original Member Notes evidencing its
Member Loans. For purposes of Section 3.2(e) of the Operating Agreement, the
foregoing exchange shall not be deemed to have any effect on the status of the
Member Commitments as they existed immediately prior to such exchange.
<PAGE> 2
2. Cumulative Redeemable Preferred Interests. Each of Charter Inc. and COI is
hereby granted, in consideration of the Member Loans being exchanged by it as
set forth herein, an additional interest in the Company (the "Cumulative
Redeemable Preferred Interest") having an initial amount (the "Initial Amount")
equal to the aggregate principal amount of its Member Loans outstanding as of
September 30, 1997 (being, in each case, $17,500,000) as follows:
(a) Each holder of such Cumulative Redeemable Preferred Interest
shall be entitled to receive a preferential allocation of Profits of the
Company (the "Preferred Return") computed like interest on the Initial
Amount at the rate of ten percent (10%) per annum, determined monthly in
arrears, commencing on October 1, 1997 and continuing on the first day of
each succeeding calendar month thereafter, on the basis of a 360-day year
for the actual number of days elapsed. Such Preferred Return shall
initially be calculated with respect to the Initial Amount and thereafter
shall be calculated on a cumulative basis, compounded monthly.
Additionally, each Cumulative Redeemable Preferred Interest shall have a
similar preferred position in the event of the dissolution and winding up
of the Company.
(b) At the option of the Company, exercised by not less than 30 days'
prior written notice from the Company to the holders of the Cumulative
Redeemable Preferred Interests, the Company may redeem all, but not less
than all, of the Cumulative Redeemable Preferred Interests on or after
April 1, 1998. In connection with any such redemption, the Company shall,
in its sole discretion, deliver to each holder (i) a cash payment in
respect of its Cumulative Redeemable Preferred Interest equal to the
Initial Amount plus all the Preferred Return thereon, calculated as set
forth above through the date of such redemption, or (ii) one or more
promissory notes payable to such holder substantially in the form of the
Member Notes in an aggregate principal amount equal to the Initial Amount
plus all the Preferred Return thereon, calculated as set forth above
through the date of such redemption, and subject to the same payment terms,
including without limitation, provisions for interest rates, interest
payment dates, and maturity, as provided in the Member Notes, or (iii) any
combination of cash or promissory notes as described in the preceding
clauses (i) and (ii); provided, however, that each holder must receive the
same form or forms of consideration (i.e., cash, promissory notes, or a
combination thereof) as the other holder in such redemption.
(c) As used above, the date of redemption shall mean the date on
which the holders actually receive the applicable consideration in such
redemption of its Cumulative Redeemable Preferred Return.
(d) Any decision by the Company to exercise or not to exercise its
option under paragraph 2(b) of this Memorandum of Agreement to redeem the
Cumulative Redeemable Preferred Interests, and all decisions relating to
redemption pursuant to such paragraph 2(b) (including without limitation
the nature and amount of the redemption proceeds to be
- 2 -
<PAGE> 3
received by the holders) shall be treated as "Major Decisions" under the
Operating Agreement, requiring approval of eighty percent (80%) of the
Governing Board.
3. Amendment of Operating Agreement. Each of Charter Inc. and COI agrees to
enter into an amendment to the Operating Agreement and other appropriate
documents to memorialize the transactions described in this Memorandum of
Agreement; provided, however, that the parties intend and agree that the
exchanges of the Member Loans for the Cumulative Redeemable Preferred Interests
in the Company have been effected hereby and no further action on the part of
any party shall be required in order to have the same become effective for all
purposes among the parties.
4. Miscellaneous.
(a) All notices, requests and demands to or upon the respective
parties hereto shall be deemed to have been given or made when personally
delivered, upon the date originally received if delivered by telecopy
transmission followed by registered or certified mail confirmation, one
business day following deposit with an overnight delivery service, or three
business days following deposit in the mail, registered or certified mail,
postage prepaid, to the respective addresses for such parties in the
Operating Agreement.
(b) The terms and provisions of this Memorandum of Agreement shall be
binding upon and inure to the benefit of the successors and assigns of
the parties hereto.
(c) This Memorandum of Agreement shall be deemed to be made in and in
all respects be governed by, and construed in accordance with, the laws of
the State of Delaware (without regard to principles of conflict of
laws). If any action is brought to enforce or interpret this Memorandum of
Agreement, exclusive venue for such action shall be in the State of
Delaware or the United States of America for the District of Delaware, and
the parties hereto irrevocably and unconditionally submit to the
jurisdiction of the state and federal courts located in the State of
Delaware for such purpose.
(d) Capitalized terms used herein without definition shall have the
respective meanings ascribed thereto in the Operating Agreement.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Memorandum of
Agreement to be executed by their duly authorized officers as of the date first
above written.
CHARTER BEHAVIORAL HEALTH
SYSTEMS, LLC
By:
-----------------------------
Name:
Title: Vice President,
Financial Services
CHARTER BEHAVIORAL HEALTH
SYSTEMS, INC.
By: /s/ CHARLOTTE A. SANFORD
-----------------------------
Name: Charlotte A. Sanford
Title: Treasurer
CRESCENT OPERATING, INC.
By: /s/ JEFFREY L. STEVENS
-----------------------------
Name: Jeffrey L. Stevens
Title: Vice President and
Chief Financial
Officer
- 4 -
<PAGE> 1
EXHIBIT 10.20
================================================================================
PURCHASE AGREEMENT
DATED AND DELIVERED AUGUST 31, 1997, TO BE EFFECTIVE AS OF JULY 31, 1997
BY AND AMONG
CRESCENT OPERATING, INC.,
ROSESTAR MANAGEMENT LLC,
GERALD W. HADDOCK,
JOHN C. GOFF
AND
SANJAY VARMA
================================================================================
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
<S> <C>
ARTICLE I - SALE AND TRANSFER OF THE MEMBERSHIP INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.1 Sale of Membership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.3 Closing Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLERS AND ROSESTAR . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.1 Organization, Qualification and Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.3 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.4 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.5 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.6 Subsidiaries and Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.7 RoseStar Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.8 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.9 Business Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.10 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.11 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.13 Tax Returns and Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.14 Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.15 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.16 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2.17 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 2.18 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 2.19 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 2.20 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.1 Corporate Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.2 Corporate Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.3 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.4 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.5 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IV - ADDITIONAL AGREEMENTS OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.1 Press Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.2 Tax Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.3 Definition of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE V - INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.1 Agreement to Indemnify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.2 Method of Asserting Claims, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS (CONT.)
PAGE
<S> <C>
Section 5.3 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VI - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.1 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.2 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.4 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.5 Binding upon Successors and Assigns, Assignment . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.8 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.9 Amendment and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.10 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.11 Construction of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBIT A - Form of Assignment of Company Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SCHEDULE 2.10 - Material Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SCHEDULE 2.11 - Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SCHEDULE 2.12 - Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SCHEDULE 2.14 - Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SCHEDULE 2.15 - Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
ii
<PAGE> 4
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is dated and delivered the
31st day of August, 1997, to be effective as of the 31st day of July, 1997, by
and among Crescent Operating, Inc., a Delaware corporation ("Purchaser"),
RoseStar Management LLC, a Texas limited liability company ("RoseStar"), Gerald
W. Haddock ("Haddock"), John C. Goff ("Goff") and Sanjay Varma ("Varma")
(Haddock, Goff and Varma are collectively referred to herein as "Sellers").
RECITALS:
A. Sellers are all of the members and managers of RoseStar.
Sellers entered into that First Amended and Restated RoseStar-Varma Resolution
Agreement dated as of July 31, 1997 (the "RoseStar-Varma Agreement") pursuant
to which Sellers, in their capacities as all of the managers and members of
RoseStar and in their individual capacities as all of the owners of the
outstanding membership interests in RoseStar (the "Membership Interests"),
agreed to sell the Membership Interests to Purchaser.
B. Purchaser desires to purchase the Membership Interests from
Sellers and each Seller desires to sell to Purchaser his Membership Interest.
C. RoseStar owns a 99% nonmanaging member's interest in RoseStar
Southwest, LLC ("Southwest"). The remaining 1% member of Southwest is RSSW
Corp., which is the manager of Southwest ("RSSW"); Sellers are all of the
stockholders and a majority of the directors of RSSW.
D. Sellers are all of the stockholders and directors of RSCR
Arizona Corp. ("RSCR").
E. RSCR is the owner of a 1% nonmanaging membership interest in
Canyon Ranch Leasing, LLC ("Canyon Ranch"). RoseStar is the owner of a 99%
managing membership interest in Canyon Ranch. Canyon Ranch is the lessee of
Canyon Ranch-Tucson under a Lease Agreement dated July 26, 1996, (the "Canyon
Ranch Lease") with Canyon Ranch, Inc., which has assigned its right, title and
interest in that lease to Crescent Real Estate Equities Limited Partnership
("Crescent Partnership"). Sellers have guaranteed payment and performance to
Crescent Partnership, under a Limited Guaranty Agreement dated July 26, 1996,
of obligations of Canyon Ranch under the Canyon Ranch Lease, that $2,400,000
FFE Note (so called in the Limited Guaranty Agreement) and that $648,360
Lifeshare Note (so called in the Limited Guaranty Agreement), subject to an
aggregate limitation of liability of $200,000 (against which are credited all
capital contributions to Canyon Ranch made from time to time by RoseStar).
F. RoseStar owns 100% of the membership interests in Wine Country
Hotel, LLC, d/b/a Vintage Resorts ("Vintage"). Vintage is the lessee of (i)
Sonoma Mission Inn under a lease agreement dated November 18, 1996 (the "Sonoma
Lease") with Crescent Partnership and (ii) Canyon Ranch-Lenox under a lease
agreement dated December 11, 1996 (the "Lenox
<PAGE> 5
Lease") with Bellefontaine Associates, which has assigned its right, title and
interest in and to the Lenox Lease to Crescent Real Estate Funding VI
("Funding").
G. RoseStar is the lessee of Marriott City Center, Denver, under
an Amended and Restated Lease Agreement dated June 30, 1995 (the "Marriott
Lease") with Crescent Partnership. Sellers have made a Limited Guaranty
Agreement dated December 11, 1995 with respect to the Marriott Lease.
H. Southwest is the lessee of Hyatt Regency Beaver Creek, Avon,
Colorado, under an Amended and Restated Lease Agreement dated January 1, 1996,
with Crescent Real Estate Funding II, L.P. ("Crescent Sub"), a subsidiary of
Crescent Partnership, as amended by that First Amendment dated April 1, 1996
("Beaver Creek Lease"). Sellers have guaranteed repayment to Crescent Sub,
under a Limited Guaranty Agreement dated January 1, 1996 with respect to the
Beaver Creek Lease.
I. Southwest is also the lessee of Hyatt Regency Albuquerque, New
Mexico, under a Lease Agreement dated December 19, 1995, with Crescent Sub, as
amended by that First Amendment dated April 1, 1996 ("Albuquerque Lease").
Sellers have guaranteed repayment to Crescent Sub, under a Limited Guaranty
Agreement dated December 19, 1995 with respect to the Albuquerque Lease.
J. The Marriott Lease, the Beaver Creek Lease, the Canyon Ranch
Lease, the Albuquerque Lease, the Sonoma Lease and the Lenox Lease are
collectively referred to herein as the "Leases". The lessors under the
Marriott Lease, the Beaver Creek Lease, the Albuquerque Lease, the Canyon Ranch
Lease, the Sonoma Lease and the Lenox Lease are collectively referred to herein
as the "Lessors". Southwest, Canyon Ranch and Vintage are collectively
referred to herein as the "Subsidiaries" and individually referred to herein as
a "Subsidiary".
K. The Varma Group, Inc. ("VGI"), which is owned by Varma and his
wife, Johanna Varma, provides RoseStar, Southwest and Vintage with asset
management services relating to their leasehold interests under the Marriott
Lease, the Beaver Creek Lease, the Albuquerque Lease and the Sonoma Lease,
pursuant to Asset Management Agreements dated May 1, 1996 (November 19, 1996
with respect to the Sonoma Lease).
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and subject to the conditions set forth herein, the
parties hereto agree as follows:
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ARTICLE I
SALE AND TRANSFER OF THE MEMBERSHIP INTERESTS
SECTION 1.1 SALE OF MEMBERSHIP INTERESTS. Subject to the
terms and conditions of this Agreement, Sellers hereby sell, transfer and
deliver to Purchaser, and Purchaser hereby purchases from each Seller, each
Seller's Membership Interest as set forth below:
Haddock 4.5% Membership Interest
Goff 4.5% Membership Interest
Varma 91.0% Membership Interest
SECTION 1.2 PURCHASE PRICE. The aggregate purchase price (the
"Purchase Price") for the Membership Interests shall be equal to an aggregate
of $2,000,000, to be delivered concurrently with the execution of this
Agreement by Purchaser's checks payable as follows:
<TABLE>
<S> <C>
Haddock $ 90,000
Goff $ 90,000
Varma $ 1,820,000
</TABLE>
SECTION 1.3 CLOSING DELIVERIES. Concurrently with the execution
of this Agreement:
(a) Each Seller shall deliver to Purchaser:
(i) an Assignment of Company Interest (the "Assignment")
in the form of Exhibit A attached hereto and incorporated herein by
reference, pursuant to which each Seller shall sell, assign, transfer,
convey and delivery to Purchaser his respective Membership Interest;
(ii) the written consent of each Lessor to the
transactions contemplated by this Agreement;
(iii) an estoppel certificate executed by each Lessor
certifying that each Lease is in full force and effect and no default
by the tenant thereunder exists as of the date of this Agreement;
(iv) an Amended and Restated Management Agreement (herein
so called) with each of RoseStar, Southwest and Vintage substantially
in the form attached as "Exhibit A" to the RoseStar-Varma Agreement
executed by VGI;
(v) Certificates representing all of the issued and
outstanding common stock of RSSW and RSCR owned by Sellers, duly
endorsed in blank or accompanied by duly executed stock powers;
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(vi) a release by Lessors of each Seller from any and all
matters relating to or connected with the Leases through the date of
this Agreement and a release by Lessors of each Seller from every
Limited Guaranty Agreement relating to the Leases;
(vii) a Mutual Release in substantially the form attached
as "Exhibit B" to the RoseStar-Varma Agreement;
(viii) a list of the bank accounts (the "Bank Accounts")
maintained by RoseStar and each Subsidiary indicating the current
balance in each account and an account signature card for each account
removing Sellers as authorized signatories to each account and adding
Purchaser as an authorized signatory to each such account;
(ix) all other agreements, instruments and/or documents to
be delivered by Seller to Purchaser pursuant to this Agreement.
(b) Purchaser shall deliver to Sellers:
(i) the Purchase Price; and
(ii) all other agreements, instruments and/or documents to
be delivered by Purchaser to Sellers pursuant to this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS AND ROSESTAR
To induce Purchaser to enter into this Agreement and to consummate the
transactions contemplated hereby, Sellers and RoseStar jointly and severally
represent and warrant as follows:
SECTION 2.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. To
the knowledge of Sellers, RoseStar and each Subsidiary is a limited liability
company duly organized, validly existing and in good standing under the laws of
the state of its organization, and, to the knowledge of RoseStar and Sellers,
each has all powers and all material governmental licenses, authorizations,
licenses, permits, consents and approvals (collectively, "Governmental
Authorizations") required to carry on the business in which it is engaged and
to own and use the properties owned and used by it, except such Governmental
Authorizations the absence of which would not have a Material Adverse Effect
(as hereinafter defined) on RoseStar and the Subsidiaries taken as a whole.
Sellers and/or Rosestar have delivered to Purchaser true and complete copies of
the Articles of Organization and Regulations or Operating Agreement of RoseStar
and each Subsidiary, each of which reflect all amendments made thereto at any
time prior to the date of this Agreement. To the knowledge of Sellers,
RoseStar and each Subsidiary is duly qualified to do business as a foreign
limited liability company and is in good
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standing in each jurisdiction where the character of the property owned or
leased by it, the employment of its employees or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
would not have a Material Adverse Effect on RoseStar and the Subsidiaries taken
as a whole. To the knowledge of Sellers, the Regulations and/or Operating
Agreement and schedule of members of RoseStar and each Subsidiary (copies of
which Sellers have previously furnished to Purchaser) are complete and correct
in all respects and accurately reflect the record ownership and, to the
knowledge of Sellers, the beneficial ownership of all the outstanding
membership interests in RoseStar and each Subsidiary. To the knowledge of
Sellers, neither RoseStar nor any Subsidiary is in default or in violation of
any restriction, lien, encumbrance, indenture, contract, lease, sublease, loan
agreement, note or other obligation or liability by which it is bound or to
which any of its assets is subject, except such defaults or violations which
would not have a Material Adverse Effect on RoseStar and the Subsidiaries taken
as a whole. For purposes of this Agreement, a "Material Adverse Effect," with
respect to any person or entity (including without limitation RoseStar, any
Subsidiary and/or Purchaser), means a material adverse effect on the condition
(financial or otherwise), business, properties, assets, liabilities (including
contingent liabilities), results of operations or prospects of such person or
entity and the affiliated companies and subsidiaries and/or parent corporation
and/or corporations of such person or entity under the same ownership, taken as
a whole; and "Material Adverse Change" means a change or a development which
has resulted or will result in a Material Adverse Effect.
SECTION 2.2 AUTHORIZATION.
(a) This Agreement and the agreements, instruments and documents
contemplated hereby which are to be executed by Sellers have been duly executed
and delivered by each Seller and constitute, or upon execution and delivery by
each Seller will constitute, valid and binding agreements of such Seller,
enforceable against him, in each case, in accordance with their respective
terms, except as such enforcement may be limited by bankruptcy, insolvency or
other similar laws effecting the enforcement of creditors' rights generally or
by general principles of equity.
(b) The execution, delivery and performance by RoseStar of this
Agreement and the agreements, instruments and documents contemplated hereby
which are to be executed by RoseStar, and the consummation by RoseStar of the
transactions contemplated hereby and thereby are within the powers of RoseStar
and have been duly authorized by all necessary actions of the members and
managers of RoseStar. This Agreement and the agreements, instruments and
documents contemplated hereby which are to be executed by RoseStar have been
duly executed and delivered by RoseStar and constitute or, upon execution and
delivery by RoseStar will constitute, valid and binding agreements of RoseStar
enforceable against RoseStar, in each case, in accordance with their respective
terms, except as such enforcement may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights, generally or
by general principles of equity.
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SECTION 2.3 GOVERNMENTAL AUTHORIZATION. To the knowledge of
RoseStar and Sellers, none of the execution and delivery by Sellers and/or
RoseStar of this Agreement or the agreements, instruments and documents
contemplated hereby, the performance by Sellers and/or RoseStar of their
respective obligations hereunder and thereunder or the consummation by Sellers
and/or RoseStar of the transactions contemplated hereunder and thereunder
requires any filing by RoseStar or Sellers with any governmental body, agency,
official or authority.
SECTION 2.4 NON-CONTRAVENTION. To the knowledge of RoseStar and
Sellers, none of the execution and delivery by Sellers and/or RoseStar of this
Agreement or the agreements, instruments and documents contemplated hereby, the
performance by Sellers and/or RoseStar of their respective obligations
hereunder and thereunder or the consummation by Sellers and/or RoseStar of the
transactions contemplated hereunder and/or thereunder does or will:
(a) contravene or conflict with the Articles of Organization,
Regulations or Operating Agreement of RoseStar or any Subsidiary, except a
contravention or conflict which shall have been properly waived;
(b) contravene or conflict with or constitute a violation of
any provision of any law, regulation, judgment, injunction, order, decree,
governmental permit or license or statute to which RoseStar, any Subsidiary
and/or any Seller is a party or by which RoseStar, any Subsidiary and/or any
Seller is bound;
(c) violate, breach, be in conflict with or constitute a default
(or an event that, with notice or lapse of time or both, would constitute a
default) under any material note, bond, indenture, mortgage, deed of trust,
lease, franchise, permit, authorization, license, contract, instrument or other
agreement or commitment to which RoseStar, any Subsidiary or any Seller is a
party or by which RoseStar or any Subsidiary or any of their assets or
properties is bound or encumbered;
(d) result in a contractual right to cause the termination or
cancellation of or loss of a material benefit under, or the right to accelerate
any obligations pursuant to, any material note, bond, indenture, mortgage, deed
of trust, lease, franchise, permit, authorization, license, contract,
instrument or other agreement or commitment to which RoseStar or any Subsidiary
is a party or which is binding upon RoseStar or any Subsidiary or any material
license, franchise, permit or other similar authorization held by RoseStar or
any Subsidiary; or
(e) result in the creation or imposition of any Lien (as
hereinafter defined) upon any properties, assets or business of RoseStar or
any Subsidiary;
except, with respect to clauses (b), (c), (d) and (e) above, for
contraventions, defaults, losses, Liens and other matters referred to in such
clauses that in the aggregate could not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect on RoseStar. For
purposes of this Agreement, the term "Lien" means, with respect to any asset,
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any mortgage, lien, pledge, charge, security interest or encumbrance of any
kind in respect of such asset.
SECTION 2.5 TITLE. The Membership Interests constitute all of
the outstanding membership interests in RoseStar and are owned (of record and
beneficially) by Sellers as described in Section 1.1 hereof, free and clear of
all Liens or other encumbrances. Upon consummation of the transactions
contemplated by this Agreement and the agreements, instruments and documents
contemplated hereby, Purchaser will acquire all of the outstanding membership
interests in RoseStar free and clear of any Liens or encumbrances of any
nature. The Membership Interests have been duly authorized and are validly
issued. The Membership Interests have been issued and purchased in compliance
with all applicable laws, rules and regulations, including, without limitation,
all applicable securities laws, rules and regulations.
SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES. Other than its
interests in the Subsidiaries, RoseStar, to the knowledge of Sellers, does not
own any equity interest in any entity, is not a party to any partnership
(limited or general), joint venture or similar agreement and is not obligated
to purchase any equity interest in or any interest convertible into or
exchangeable for an equity interest in any entity or to enter into any such
agreement.
SECTION 2.7 ROSESTAR FINANCIAL STATEMENTS. Rosestar has
delivered to Purchaser the following financial information: RoseStar and
Vintage Resorts Hotels Consolidated Cash Flows, RoseStar Management LLC and
RoseStar Southwest, LLC 10 Year Forecast and Vintage Resorts, LLC 10 Year
Forecast, each of which includes actual results of operations for the twelve
month period ended December 31, 1996, and RoseStar Management LLC 1997
Forecasted Cash Flow Statement which includes actual results of operations
through May 31, 1997 (collectively, the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the period covered thereby and
present fairly in all material respects the financial condition of RoseStar as
of December 31, 1996 and the results of its operations and changes in cash
flows for such period. With respect to the forecasted information contained in
the Financial Statements, such forecasts are, to the knowledge and belief of
Sellers, based upon reasonable assumptions. Since December 31, 1996, there
have been no changes in RoseStar's methods of accounting for tax or financial
statement purposes.
SECTION 2.8 BANK ACCOUNTS. To the knowledge of Sellers, the
list of Bank Accounts delivered by Sellers to Purchaser pursuant to Section
1.3(c) hereof is complete and correct as of the date hereof. Sellers represent
and warrant to Purchaser that the aggregate balance in the Bank Accounts as of
the date hereof is at least $2,663,270.17.
SECTION 2.9 BUSINESS ACTIVITY. The purpose and business of
RoseStar and each Subsidiary is to perform as lessee under the applicable Lease
and to negotiate and enter into long term management agreements with
experienced and reputable hotel management companies. Neither RoseStar nor any
Subsidiary engages, or has engaged, in any other business activities.
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SECTION 2.10 ABSENCE OF CERTAIN CHANGES. Except as disclosed in
the RoseStar Financial Statements, on Schedule 2.10 or in the RoseStar-Varma
Agreement, since December 31, 1996, to the knowledge of RoseStar and Sellers,
RoseStar and the Subsidiaries have in all material respects conducted their
business in the ordinary course, consistent with past practices, and there has
not been:
(a) any Material Adverse Change affecting RoseStar or any
Subsidiary;
(b) any loan to or other transaction (excluding transactions
related to the performance of services as an officer, manager or employee)
outside the ordinary course of business with any officer, manager, employee or
shareholder of RoseStar or any Subsidiary giving rise to any claim or right of
RoseStar or any Subsidiary against any such person or of such person against
RoseStar or any Subsidiary;
(c) any damage, destruction or other property or casualty loss
(whether or not covered by insurance) affecting the business, assets,
liabilities, earnings or prospects of RoseStar or any Subsidiary which,
individually or in the aggregate, has had or may reasonably be expected to have
a Material Adverse Effect on RoseStar or any Subsidiary;
(d) any increase in indebtedness for borrowed money or capitalized
lease obligations of RoseStar or any Subsidiary;
(e) any sale, assignment, transfer or other disposition of any
tangible or intangible asset material to the business of RoseStar or any
Subsidiary;
(f) any amendment, termination or waiver by RoseStar or any
Subsidiary of any right of substantial value under any material note, bond,
indenture, mortgage, deed of trust, lease, franchise, permit, authorization,
license, contract, instrument or other agreement or commitment to which
RoseStar or any Subsidiary is a party or which is binding upon RoseStar or any
Subsidiary or any material license, franchise, permit or other similar
authorization held by RoseStar or any Subsidiary;
(g) any material reduction in the amounts of coverage provided by
existing casualty and liability insurance policies with respect to the business
or properties of RoseStar or any Subsidiary;
(h) any (i) grant of any severance or termination pay to any
manager, officer or employee of RoseStar or any Subsidiary, (ii) entering into
of any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any manager, officer or employee
of RoseStar or any Subsidiary, (iii) any increase in benefits payable under any
existing severance or termination pay policies or employment agreements of
RoseStar or any Subsidiary, or (iv) any increase in compensation, bonus or
other benefits payable to directors, officers or employees of RoseStar or any
Subsidiary;
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(i) any adoption of or amendment to or alteration of any bonus,
incentive, compensation, severance, stock option, stock appreciation right,
pension, matching gift, profit-sharing, employee stock ownership, retirement,
pension, group insurance, death benefit, or other fringe benefit plan,
arrangement or trust agreement in which the employees, officers or managers of
RoseStar or any Subsidiary participate;
(j) any capital expenditure, capital addition or capital
improvement incurred or undertaken by RoseStar or any Subsidiary;
(k) any other transaction or commitment entered into other than
in the ordinary course of business by RoseStar or any Subsidiary; or
(l) the entering into of any agreement by RoseStar or any
Subsidiary or any person on behalf of RoseStar or any Subsidiary to take any of
the foregoing actions.
SECTION 2.11 NO UNDISCLOSED LIABILITIES. To the knowledge
of RoseStar and Sellers, neither RoseStar nor any Subsidiary has any material
debt, liability or obligation of any nature, whether accrued, absolute,
contingent or otherwise, known or unknown, whether due or to become due,
except to the extent set forth in the Financial Statements or as set forth on
Schedule 2.11.
SECTION 2.12 LITIGATION. Schedule 2.12 sets forth any instances
in which (a) RoseStar or any Subsidiary is subject to any judgment or order
(other than orders of general applicability) of any court or quasi-judicial or
administrative agency of any jurisdiction, domestic or foreign, or where there
is any charge, complaint, lawsuit or governmental investigation pending or
threatened in writing against RoseStar or any Subsidiary or (b) RoseStar or any
Subsidiary is a plaintiff in any action, domestic or foreign, judicial or
administrative in which a counterclaim against RoseStar or any Subsidiary is
pending.
SECTION 2.13 TAX RETURNS AND AUDITS. RoseStar and each
Subsidiary is and always has been treated as a partnership for federal income
tax purposes. The taxable year of RoseStar and each Subsidiary ends December
31. To the knowledge of Sellers, RoseStar and each Subsidiary has duly and
timely filed or caused to be filed all federal, foreign, state and local
income, franchise, sales and use, value added, property, employment, excise,
informational or any other tax return (the "Tax Returns") required to be filed
by them and has paid in full or fully reserved against in the Financial
Statements all taxes, interest, penalties, assessments and deficiencies due or
claimed to be due by them to foreign, federal, state or local taxing
authorities (including taxes on properties, income, franchises, licenses,
sales, use and payrolls). To the knowledge of Sellers, such Tax Returns are
correct, and neither RoseStar nor any Subsidiary is required to pay any taxes
for such periods except as shown in such Tax Returns. Neither RoseStar nor any
Subsidiary is a United States real property holding corporation as defined in
Section 897 of the Internal Revenue Code of 1986, as amended (the "Code"). No
member of RoseStar or any Subsidiary is a foreign person within the meaning of
Section 1445(b)(2) of the Code.
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SECTION 2.14 MATERIAL AGREEMENTS.
(a) Schedule 2.14 includes a complete and accurate list of all
contracts, agreements, leases (other than the Leases), and instruments (true
and complete copies of which have been delivered to Purchaser) to which
RoseStar or any Subsidiary is a party or by which they or their properties or
assets are bound which are material to the operations, assets or business of
RoseStar or any Subsidiary or which individually involve net payments or
receipts in excess of $100,000 per annum.
(b) To the knowledge of RoseStar and Sellers, neither RoseStar nor
any Subsidiary or any other party is in default under any Material Agreement
and no event has occurred which (after notice or lapse of time or both) would
become a breach or default under, or would permit the modification,
cancellation or termination of or the acceleration of any obligation under any
Material Agreement or result in the creation of any Lien upon, or any person
obtaining any right to acquire, any properties, assets or rights of RoseStar or
any Subsidiary, which, in any such case, has had or would reasonably be
expected to have a Material Adverse Effect.
(c) To the knowledge of RoseStar and Sellers, each such Material
Agreement is in full force and effect and is valid and legally binding and
there are no material unresolved disputes involving or with respect to any such
Material Agreement. No party to a Material Agreement has advised RoseStar, any
Subsidiary or Sellers that it intends either to terminate a Material Agreement
or to refuse to renew a Material Agreement upon the expiration of the term
thereof.
SECTION 2.15 PROPERTIES.
(a) RoseStar owns no real estate. Schedule 2.15 includes a
complete and accurate description of each Lease, including the expiration date
of such Lease. Other than the Leases, neither RoseStar nor any Subsidiary is a
party to or bound by a lease of real property. To the knowledge of RoseStar
and Sellers, with respect to each Lease: (a) the Lease has been validly
executed and delivered by RoseStar or the applicable Subsidiary and, to the
knowledge of RoseStar and Sellers, by the other party or parties thereto and is
a binding agreement; (b) neither RoseStar nor the applicable Subsidiary, and to
the knowledge of RoseStar and Sellers, no other party to the lease is in
material breach or default, and no event has occurred on the part of RoseStar
or the applicable Subsidiary or, to the knowledge of RoseStar and Sellers, on
the part of any other party which, with notice or lapse of time, would
constitute such a breach or default or permit termination, modification or
acceleration under the lease; (c) the lease will continue to be binding in
accordance with its terms following the date of this Agreement; (d) neither
RoseStar nor the applicable Subsidiary has repudiated and, to the knowledge of
RoseStar and Sellers, no other party to the lease has repudiated any provision
thereof; (e) there are no disputes, oral agreements or delayed payment programs
in effect as to the lease; and (f) all facilities leased thereunder have been
approved by all necessary governmental
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authorities, have been maintained in accordance with normal industry practice
and are in good condition, working order and repair.
(b) To the knowledge of RoseStar and Sellers, RoseStar and/or the
Subsidiaries have good and marketable title to, or a valid leasehold interest
in, each item of tangible property, whether real, personal or mixed, reflected
on its books and records as owned or used by it, subject to no Liens or
encumbrances of any nature.
SECTION 2.16 ENVIRONMENTAL MATTERS.
(a) For the purposes of this Agreement, the following terms have
the following meanings:
"Environmental Laws" shall mean any and all federal, state,
local and foreign statutes, laws (including case law), regulations,
ordinances, rules, judgments, orders, decrees, codes, plans,
injunctions, permits, concessions, grants, franchises, licenses,
agreements and governmental restrictions relating to human health, the
environment or to emissions, discharges or releases of Hazardous
Substances (as hereinafter defined) into the environment or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Substances or
the clean-up or other remediation thereof.
"Environmental Liabilities" shall mean all liabilities,
whether vested or unvested, contingent or fixed, actual or potential,
which (i) arise under or relate to Environmental Laws and (ii) relate
to actions occurring or conditions existing on or prior to the date of
this Agreement.
"Hazardous Substances" shall mean any chemical, pollutant,
contaminant, material, solid waste, hazardous waste or combination
thereof, including, without limitation, (i) any toxic, radioactive,
caustic or otherwise hazardous substance, (ii) petroleum and its
derivatives, by-products and other hydrocarbons, and (iii)
polychlorinated biphenyls, asbestos, lead and radon gas, whether
solid, liquid or gaseous in nature, which poses or may pose a hazard
to human health or the environment.
"Regulated Activity" shall mean any generation, treatment,
storage, recycling, transportation, disposal, release or remediation
of any Hazardous Substances.
(b) To the knowledge of RoseStar and Sellers, no written notice,
notification, demand, request for information, citation, summons, complaint or
order has been received by RoseStar or Sellers, no complaint has been filed, no
penalty has been assessed and no investigation or review is pending or has been
threatened by any governmental entity or other party with respect to any (i)
alleged violation by RoseStar or any Subsidiary of any Environmental Law, (ii)
alleged failure by RoseStar or any Subsidiary to have any environmental permit,
certificate, license, approval, registration or authorization required in
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connection with the conduct of its business or (iii) the participation by
RoseStar or any Subsidiary in any Regulated Activity.
(c) To the knowledge of RoseStar and Sellers, neither RoseStar nor
any Subsidiary has any material Environmental Liabilities and there has been no
release of Hazardous Substances into the environment by RoseStar or any
Subsidiary or with respect to any of their properties which has had, or would
reasonably be expected to have, a Material Adverse Effect on RoseStar or any
Subsidiary.
SECTION 2.17 GUARANTEES. To the knowledge of RoseStar and
Sellers, neither RoseStar nor any Subsidiary is a guarantor or otherwise liable
for any indebtedness of any other person, firm or corporation other than
endorsements for collection in the ordinary course of business.
SECTION 2.18 POWERS OF ATTORNEY. To the knowledge of RoseStar and
Sellers, there are no outstanding powers of attorney or similar instruments
executed by RoseStar or any Subsidiary.
SECTION 2.19 COMPLIANCE WITH LAWS. To the knowledge of RoseStar
and Sellers, RoseStar and each of its respective managers, officers and
employees (the individuals only in their capacities as representatives of such
entities) have complied, in all material respects, with all applicable laws and
regulations of foreign, federal, state, provincial and local governments and
all agencies thereof, including Environmental Laws, and no claim has been filed
or threatened in writing against RoseStar or any Subsidiary alleging a
violation of any such laws or regulations.
SECTION 2.20 NO PROCEEDINGS. To the knowledge of RoseStar and
Sellers , there is no legal action or governmental proceeding or investigation
pending or, to the knowledge of Sellers and RoseStar, threatened against
Sellers or RoseStar that would adversely affect or prevent the consummation of
the transactions contemplated by this Agreement or the agreements, instruments
or documents contemplated hereby, nor are RoseStar or Sellers subject to any
outstanding order of any court or governmental authority that could adversely
affect or prevent the consummation of the transactions contemplated by this
Agreement or the agreements, instruments or documents contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
To induce Sellers and RoseStar to enter into this Agreement and to
consummate the transactions contemplated hereby, Purchaser represents and
warrants as follows:
SECTION 3.1 CORPORATE EXISTENCE AND GOOD STANDING. Purchaser is
a corporation duly organized, validly existing and in good standing under the
laws of the state of Delaware.
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SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and
performance by Purchaser of this Agreement and the agreements, instruments and
documents contemplated hereby which are to be executed by Purchaser, and the
consummation by Purchaser of the transactions contemplated hereby and thereby
are within the corporate powers of Purchaser and have been duly authorized by
all necessary action of the shareholders and directors of Purchaser. This
Agreement and the agreements, instruments and documents contemplated hereby
which are to be executed by Purchaser have been duly executed and delivered by
Purchaser and constitute, or upon execution and delivery by Purchaser will
constitute, valid and binding agreements of Purchaser enforceable against
Purchaser in each case in accordance with their respective terms, except as
such enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally or by general
principles of equity.
SECTION 3.3 GOVERNMENTAL AUTHORIZATION. None of the execution
and delivery by Purchaser of this Agreement or the agreements, instruments and
documents contemplated hereby, the performance by Purchaser of its obligations
hereunder and thereunder or the consummation by Purchaser of the transactions
contemplated hereunder or thereunder requires any filing by Purchaser with any
governmental body, agency, official or authority.
SECTION 3.4 NON-CONTRAVENTION. To the knowledge of Purchaser,
none of the execution and delivery by Purchaser of this Agreement and the
agreements, instruments or documents contemplated hereby, the performance by
Purchaser of its obligations hereunder and thereunder or the consummation by
Purchaser of the transactions contemplated hereunder or thereunder does or
will:
(a) contravene or conflict with the Certificate of Incorporation
or Bylaws of Purchaser; or
(b) contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree,
governmental permit or license or statute to which Purchaser is a party or by
which Purchaser is bound.
SECTION 3.5 NO PROCEEDINGS. To the knowledge of Purchaser, there
is no legal action or governmental proceeding or investigation pending or, to
the knowledge of Purchaser, threatened against Purchaser that would adversely
affect or prevent the consummation of the transactions contemplated by this
Agreement and the agreements, instruments and documents contemplated hereby,
nor is Purchaser subject to any outstanding order of any court or governmental
authority that could adversely affect or prevent the consummation of the
transactions contemplated by this Agreement and the agreements, instruments and
documents contemplated hereby.
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ARTICLE IV
ADDITIONAL AGREEMENTS OF THE PARTIES
SECTION 4.1 PRESS RELEASES. Purchaser, RoseStar and Sellers
shall consult with each other as to the form and substance of any press release
or other public disclosure of matters related to this Agreement or any of the
transactions contemplated hereby; provided, however, that nothing in this
Section shall be deemed to prohibit any party hereto from making any disclosure
that is required to fulfill such party's disclosure obligations imposed by law,
including, without limitation, federal, state or provincial securities laws.
SECTION 4.2 TAX COOPERATION. Purchaser, RoseStar and Sellers
shall cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any gains, sales,
use, transfer or value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes or fees which
become payable in connection with the transactions contemplated by this
Agreement that are required or permitted to be filed at any time before or
after the date of this Agreement. Purchaser and Sellers shall not take
inconsistent reporting positions with the IRS with respect to the transactions
contemplated by this Agreement. Purchaser agrees not to amend any tax position
with respect to RoseStar taken prior to the date of this Agreement other than
such amendments as may be required in the opinion of Purchaser's legal counsel
in order to comply with the Code.
SECTION 4.3 DEFINITION OF KNOWLEDGE. For purposes of this
Agreement, "to the knowledge of Sellers" shall mean the actual knowledge
without any duty of independent investigation of each Seller on an individual
basis, i.e., no individual Seller shall be responsible for the representations
and warranties made by any other Seller.
ARTICLE V
INDEMNIFICATION
SECTION 5.1 AGREEMENT TO INDEMNIFY. PURCHASER WILL INDEMNIFY IN
RESPECT OF, AND HOLD ROSESTAR, SELLERS AND THEIR RESPECTIVE AFFILIATES,
OFFICERS, MANAGERS, DIRECTORS, EMPLOYEES AND AGENTS HARMLESS AGAINST, ANY AND
ALL DAMAGES, CLAIMS, DEFICIENCIES, LOSSES, INCLUDING TAXES, AND ALL EXPENSES
(INCLUDING INTEREST, PENALTIES, AND ATTORNEYS' AND ACCOUNTANTS' FEES AND
DISBURSEMENTS BUT REDUCED BY ANY TAX SAVINGS, BENEFITS OR OFFSETS TO WHICH ANY
PARTY SHALL BE ENTITLED DIRECTLY OR INDIRECTLY BY REASON THEREOF) (COLLECTIVELY
"DAMAGES") RESULTING FROM ANY MISREPRESENTATION, BREACH OF WARRANTY OR
NONFULFILLMENT OR FAILURE TO PERFORM ANY COVENANT OR AGREEMENT ON THE PART OF
PURCHASER UNDER THIS AGREEMENT. ROSESTAR AND SELLERS JOINTLY AND SEVERALLY
AGREE TO INDEMNIFY IN RESPECT OF, AND HOLD PURCHASER AND ITS AFFILIATES AND
THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS HARMLESS AGAINST,
ANY AND ALL DAMAGES RESULTING FROM ANY MISREPRESENTATION,
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<PAGE> 18
BREACH OF WARRANTY, OR NONFULFILLMENT OR FAILURE TO PERFORM ANY COVENANT OR
AGREEMENT ON THE PART OF ROSESTAR OR SELLERS UNDER THIS AGREEMENT. THE PARTY OR
PARTIES CLAIMING INDEMNIFICATION HEREUNDER (WHETHER ONE OR MORE) ARE
HEREINAFTER COLLECTIVELY REFERRED TO AS THE "INDEMNIFIED PARTY" AND THE PARTY
AGAINST WHOM SUCH CLAIMS ARE ASSERTED HEREUNDER IS HEREINAFTER REFERRED TO AS
TO THE "INDEMNIFYING PARTY." ANY OBLIGATION UNDER THIS AGREEMENT TO PROVIDE
INDEMNIFICATION WILL BE GOVERNED BY THE PROCEDURES SET FORTH IN THIS ARTICLE
VII.
SECTION 5.2 METHOD OF ASSERTING CLAIMS, ETC. All claims for
indemnification by any Indemnified Party under this Agreement will be asserted
and resolved as follows:
(a) In the event that any claim or demand for which an
Indemnifying Party would be liable to an Indemnified Party hereunder
is asserted against or sought to be collected from such Indemnified
Party by a third party (a "Third Party Claim"), such Indemnified Party
will with reasonable promptness notify the Indemnifying Party of such
claim or demand, specifying the nature of and specific basis for such
claim or demand and the amount or the estimated amount thereof to the
extent then feasible (which estimate will not be conclusive of the
final amount of such claim and demand (the "Claim Notice")). The
Indemnifying Party will not be obligated to indemnify such Indemnified
Party with respect to any such claim or demand to the extent the
failure of such Indemnified Party to promptly notify the Indemnifying
Party of such a claim or demand materially prejudices the Indemnifying
Party's ability to defend against the claim or demand. The
Indemnifying Party will have 30 days from the personal delivery or
mailing of the Claim Notice (the "Notice Period") to notify such
Indemnified Party (i) whether or not it disputes the liability of the
Indemnifying Party to such Indemnified Party hereunder with respect to
such claim or demand and (ii) whether or not it desires at the sole
cost and expense of the Indemnifying Party, to defend such Indemnified
Party against such claim or demand; provided, however, that such
Indemnified Party is hereby authorized prior to and during the Notice
Period to file any motion, answer or other pleading which it deems
necessary or appropriate to protect its interests or those of the
Indemnifying Party and not materially prejudicial to the Indemnifying
Party. In the event that the Indemnifying Party notifies such
Indemnified Party within the Notice Period that it desires to defend
such Indemnified Party against such claim or demand, except as
hereinafter provided, the Indemnifying Party will have the right to
defend by all appropriate proceedings and control the defense of any
such claim or demand, including any and all appeals and negotiations
with respect thereto. The Indemnifying Party will also have the right
to effect settlement or compromise of any such claim or demand. If the
Indemnified Party desires to participate in, but not control, any such
defense or settlement it may do so at its sole cost and expense. If
requested by the Indemnifying Party, such Indemnified Party agrees to
cooperate with the Indemnifying Party and its counsel in contesting
any claim or demand which the Indemnifying Party elects to contest,
and, if appropriate and related to the claim in question, in making
any counterclaim against the person asserting the third party claim or
demand, or any cross-complaint against any person. No claim may be
settled by the
15
<PAGE> 19
Indemnifying Party without the consent of such Indemnified Party,
which consent will not be unreasonably withheld. Notwithstanding the
foregoing, in connection with a Third Party Claim asserted against
both such Indemnified Party and the Indemnifying Party, if (i) such
Indemnified Party has available to it defenses which are in addition
to those available to the Indemnifying Party, (ii) such Indemnified
Party has available to it defenses which are inconsistent with the
defenses available to the Indemnifying Party or (iii) a conflict
exists or may reasonably be expected to exist in connection with the
representation of both such Indemnified Party and the Indemnifying
Party by the legal counsel chosen by the Indemnifying Party, such
Indemnified Party will have the right to select its own legal counsel
subject to the approval of such legal counsel by the Indemnifying
Party, such approval not to be unreasonably withheld. If such
Indemnified Party selects its own legal counsel pursuant to the
immediately preceding sentence and the underlying Third Party Claim is
otherwise subject to the scope of the indemnification obligations of
the Indemnifying Party pursuant to this Article VII, the reasonable
fees and expenses of such legal counsel will be included within the
indemnification obligations of the Indemnifying Party; provided that
under no circumstances will the Indemnifying Party be obligated to
indemnify such Indemnified Party against the fees and expenses of more
than one legal counsel selected by such Indemnified Party in
connection with a single claim (notwithstanding the number persons
against whom the Third Party Claim may be asserted).
(b) In the event any Indemnified Party should have a
claim against any Indemnifying Party hereunder which does not involve
a claim or demand being asserted against or sought to be collected
from it by a third party, such Indemnified Party will send a Claim
Notice with respect to such claim to such Indemnifying Party. If such
Indemnifying Party does not notify such Indemnified Party within the
Notice Period that such Indemnifying Party disputes such claim, the
amount of such claim will be conclusively deemed a liability of such
Indemnifying Party hereunder.
SECTION 5.3 LIMITATION OF LIABILITY. The maximum aggregate
liability of Sellers for any claim, demand or other liability arising out of,
attributable to or resulting from the transactions contemplated by this
Agreement, including, without limitation, any breach of the representations,
warranties or covenants contained in this Agreement, shall be limited to an
aggregate amount equal to the Purchase Price. The maximum aggregate liability
of each individual Seller with respect to any claim, demand or liability
asserted by Purchaser will be limited to an aggregate amount equal to the value
of that portion of the Purchase Price received by such Seller pursuant to
Section 1.2 of this Agreement. The maximum aggregate liability of Purchaser
with respect to any claim, demand or liability asserted by Sellers will be
limited to an aggregate amount equal to the Purchase Price.
16
<PAGE> 20
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 FURTHER ASSURANCES. Each party agrees to
cooperate fully with the other parties and to execute such further
instruments, documents and agreements and to give such further written
assurances as may be reasonably requested by any other party to better evidence
and reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
SECTION 6.2 FEES AND EXPENSES. Until otherwise agreed by the
parties, each party shall bear its own fees and expenses, including, without
limitation, counsel fees and fees of brokers and investment bankers contracted
by such party, in connection with the transaction contemplated hereby.
SECTION 6.3 NOTICES. All notices, demands, requests or other
communications that may be or are required to be given, served or sent by
either party to the other party pursuant to this Agreement will be in writing
and will be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, telegram or
facsimile transmission addressed as follows:
<TABLE>
<S> <C>
(a) If to Purchaser: Crescent Operating, Inc.
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 339-1001
Attn.: Jeffrey L. Stevens, Treasurer,
Chief Financial Officer and Secretary
with a copy (which will
not constitute notice) to: Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Facsimile Transmission No.: (214) 745-5390
Attn.: Thomas R. Helfand, Esq.
(b) If to Haddock: Gerald W. Haddock
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 878-0429
(c) If to Goff: John C. Goff
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 820-6650
</TABLE>
17
<PAGE> 21
<TABLE>
<S> <C>
(d) If to Varma: Sanjay Varma
777 Main Street, Suite 2680
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 820-0469
</TABLE>
Either party may designate by written notice a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above will be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a facsimile transmission) the answer back being
deemed conclusive evidence of such delivery or at such time as delivery is
refused by the addressee upon presentation.
SECTION 6.4 APPLICABLE LAW. THIS AGREEMENT AND THE AGREEMENTS,
INSTRUMENTS AND DOCUMENTS CONTEMPLATED HEREBY WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF CONFLICTS OF
LAW PRINCIPLES) AND WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL
FOR PERFORMANCE IN TARRANT COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS
WILL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO,
WHETHER IN LAW OR EQUITY, ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE
AGREEMENTS, INSTRUMENTS AND DOCUMENTS CONTEMPLATED HEREBY. THE PARTIES CONSENT
TO AND AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH
DISPUTE, WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN DALLAS COUNTY,
TEXAS. EACH OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH
DISPUTE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I)
SUCH PARTY IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II)
SUCH PARTY AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY
SUCH COURTS OR (III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN
INCONVENIENT FORUM.
SECTION 6.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT.
This Agreement and the provisions hereof shall be binding upon each of the
parties, their permitted successors and assigns. This Agreement may not be
assigned by any party without the prior consent of the other; provided,
however, that Purchaser may assign all or any portion of its rights and
delegate all or any portion of its obligations under this Agreement to any
subsidiary of Purchaser;
18
<PAGE> 22
provided that Purchaser will remain jointly and severally liable for the
performance of Purchaser's obligations hereunder.
SECTION 6.6 SEVERABILITY. If any provision of this Agreement, or
the application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances shall continue in full force and
effect and in no way be affected, impaired or invalidated.
SECTION 6.7 ENTIRE AGREEMENT. This Agreement, together with the
agreements,instruments and documents contemplated hereby constitute the entire
understanding and agreement of the parties with respect to the subject matter
hereof and thereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between parties with respect to such subject matter.
SECTION 6.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties and covenants contained in this Agreement shall
survive the consummation of the transactions contemplated hereby.
SECTION 6.9 AMENDMENT AND WAIVERS. No amendment of any provision
of this Agreement shall be valid unless the same shall be in writing and signed
by the parties hereto. No waiver by any part of any default, misrepresentation
or breach of warranty or covenant hereunder, whether intentional or not, shall
not be deemed to extend to any prior or subsequent default, misrepresentation
or breach of warranty or covenant hereunder or affect in any way any rights
arising by virtue of any prior or subsequent such occurrence.
SECTION 6.10 NO WAIVER. The failure of any party to enforce any
of the provisions hereof shall not be construed to be a waiver of the right of
such party thereafter to enforce such provisions.
SECTION 6.11 CONSTRUCTION OF AGREEMENT. A reference to an
Article, Section or an Exhibit shall mean an Article of, a Section in, or
Exhibit to, this Agreement unless otherwise explicitly set forth. The titles
and headings herein are for reference purposes only and shall not in any manner
limit the construction of this Agreement which shall be considered as a whole.
The words "include," "includes" and "including" when used herein shall be
deemed in each case to be followed by the words "without limitation."
SECTION 6.12 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against any party
whose signature appears thereon and all of which together shall constitute one
and the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all the parties reflected hereon as signatories.
19
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
<TABLE>
<S> <C>
CRESCENT OPERATING, INC.
By:
---------------------------------------------
Jeffrey L. Stevens, Treasurer,
Chief Financial Officer and Secretary
-----------------------------------------------
Gerald W. Haddock
-----------------------------------------------
John C. Goff
-----------------------------------------------
Sanjay Varma
ROSESTAR MANAGEMENT LLC
By:
--------------------------------------------
Gerald W. Haddock, Manager
By:
--------------------------------------------
John C. Goff, Manager
By:
--------------------------------------------
Sanjay Varma, Manager
</TABLE>
20
<PAGE> 1
EXHIBIT 10.21
================================================================================
STOCK PURCHASE AGREEMENT
DATED AND DELIVERED AS OF AUGUST 31, 1997, TO BE EFFECTIVE AS OF JULY 31, 1997
BY AND AMONG
CRESCENT OPERATING, INC.,
GERALD W. HADDOCK,
JOHN C. GOFF
AND
SANJAY VARMA
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I SALE AND TRANSFER OF THE RSSW COMMON STOCK
Section 1.1 Sale of RSSW Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.2 Closing Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS AND ROSESTAR
Section 2.1 Organization, Qualification and Corporate Power . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.3 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.4 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.5 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.6 Subsidiaries and Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.7 RoseStar Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.8 Business Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.9 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.10 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.11 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.12 Tax Returns and Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.13 Material Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.14 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.15 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.16 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.17 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.18 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.19 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER
Section 3.1 Corporate Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.2 Corporate Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.3 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.4 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.5 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE IV ADDITIONAL AGREEMENTS OF THE PARTIES
Section 4.1 Press Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 4.2 Tax Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 4.3 Definition of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE V MISCELLANEOUS
Section 5.1 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.2 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.4 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS (CONT.)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 5.5 Binding upon Successors and Assigns, Assignment . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.8 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.9 Amendment and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.10 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.11 Construction of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SCHEDULE 2.9 Material Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SCHEDULE 2.10 Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SCHEDULE 2.11 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SCHEDULE 2.14 Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
ii
<PAGE> 4
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is dated and
delivered as of the 31st day of August, 1997, to be effective as of July 31,
1997, by and among Crescent Operating, Inc., a Delaware corporation
("Purchaser"), Gerald W. Haddock ("Haddock"), John C. Goff ("Goff") and Sanjay
Varma ("Varma") (Haddock, Goff and Varma are collectively referred to herein as
"Sellers").
RECITALS:
A. Sellers are all of the members and managers of RoseStar
Management LLC ("RoseStar"). Sellers entered into that First Amended and
Restated RoseStar-Varma Resolution Agreement dated as of July 31, 1997 (the
"RoseStar-Varma Agreement") pursuant to which Sellers, in their capacities as
all of the managers and members of RoseStar and in their individual capacities
as all of the owners of the outstanding membership interests in RoseStar (the
"Membership Interests"), agreed to sell the Membership Interests to Purchaser.
B. RoseStar owns a 99% nonmanaging member's interest in RoseStar
Southwest, LLC ("Southwest"). The remaining 1% member of Southwest is RSSW
Corp., which is the manager of Southwest ("RSSW"); Sellers are all of the
stockholders and a majority of the directors of RSSW.
C. In connection with the sale by Sellers of the Membership
Interests, Sellers also desire to sell to Purchaser, and Purchaser desires to
purchase, all of the issued and outstanding Common Stock of RSSW owned by
Sellers.
D. Sellers are all of the stockholders and directors of RSCR
Arizona Corp. ("RSCR").
E. RSCR is the owner of a 1% nonmanaging membership interest in
Canyon Ranch Leasing, LLC ("Canyon Ranch"). RoseStar is the owner of a 99%
managing membership interest in Canyon Ranch. Canyon Ranch is the lessee of
Canyon Ranch-Tucson under a Lease Agreement dated July 26, 1996, (the "Canyon
Ranch Lease") with Canyon Ranch, Inc., which has assigned its right, title and
interest in that lease to Crescent Real Estate Equities Limited Partnership
("Crescent Partnership"). Sellers have guaranteed payment and performance to
Crescent Partnership, under a Limited Guaranty Agreement dated July 26, 1996,
of obligations of Canyon Ranch under the Canyon Ranch Lease, that $2,400,000
FFE Note (so called in the Limited Guaranty Agreement) and that $648,360
Lifeshare Note (so called in the Limited Guaranty Agreement), subject to an
aggregate limitation of liability of $200,000 (against which are credited all
capital contributions to Canyon Ranch made from time to time by RoseStar).
F. RoseStar owns 100% of the membership interests in Wine Country
Hotel, LLC, d/b/a Vintage Resorts ("Vintage"). Vintage is the lessee of (i)
Sonoma Mission Inn under a lease agreement dated November 18, 1996 (the "Sonoma
Lease") with Crescent Partnership and (ii) Canyon Ranch-Lenox under a lease
agreement dated December 11, 1996 (the "Lenox
<PAGE> 5
Lease") with Bellefontaine Associates, which has assigned its right, title and
interest in and to the Lenox Lease to Crescent Real Estate Funding VI
("Funding").
G. RoseStar is the lessee of Marriott City Center, Denver, under
an Amended and Restated Lease Agreement dated June 30, 1995 (the "Marriott
Lease") with Crescent Partnership. Sellers have made a Limited Guaranty
Agreement dated December 11, 1995 with respect to the Marriott Lease.
H. Southwest is the lessee of Hyatt Regency Beaver Creek, Avon,
Colorado, under an Amended and Restated Lease Agreement dated January 1, 1996,
with Crescent Real Estate Funding II, L.P. ("Crescent Sub"), a subsidiary of
Crescent Partnership, as amended by that First Amendment dated April 1, 1996
("Beaver Creek Lease"). Sellers have guaranteed repayment to Crescent Sub,
under a Limited Guaranty Agreement dated January 1, 1996 with respect to the
Beaver Creek Lease.
I. Southwest is also the lessee of Hyatt Regency Albuquerque, New
Mexico, under a Lease Agreement dated December 19, 1995, with Crescent Sub, as
amended by that First Amendment dated April 1, 1996 ("Albuquerque Lease").
Sellers have guaranteed repayment to Crescent Sub, under a Limited Guaranty
Agreement dated December 19, 1995 with respect to the Albuquerque Lease.
J. The Marriott Lease, the Beaver Creek Lease, the Canyon Ranch
Lease, the Albuquerque Lease, the Sonoma Lease and the Lenox Lease are
collectively referred to herein as the "Leases". The lessors under the
Marriott Lease, the Beaver Creek Lease, the Albuquerque Lease, the Canyon Ranch
Lease, the Sonoma Lease and the Lenox Lease are collectively referred to herein
as the "Lessors". Southwest, Canyon Ranch and Vintage are collectively
referred to herein as the "Subsidiaries" and individually referred to herein as
a "Subsidiary".
K. The Varma Group, Inc. ("VGI"), which is owned by Varma and his
wife, Johanna Varma, provides RoseStar, Southwest and Vintage with asset
management services relating to their leasehold interests under the Marriott
Lease, the Beaver Creek Lease, the Albuquerque Lease and the Sonoma Lease,
pursuant to Asset Management Agreements dated May 1, 1996 (November 19, 1996
with respect to the Sonoma Lease).
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and subject to the conditions set forth herein, the
parties hereto agree as follows:
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ARTICLE I
SALE AND TRANSFER OF THE RSSW COMMON STOCK
SECTION 1.1 SALE OF RSSW COMMON STOCK. Subject to the
terms and conditions of this Agreement, Sellers hereby sell, transfer and
deliver to Purchaser, and Purchaser hereby purchases from each Seller, the
shares of the common stock, $.01 par value per share (the "RSSW Common Stock"),
owned by each Seller as set forth below:
<TABLE>
<S> <C>
Haddock 45 shares
Goff 45 shares
Varma 910 shares
</TABLE>
SECTION 1.2 CLOSING DELIVERIES. Concurrently with the execution
of this Agreement:
(a) Each Seller shall deliver to Purchaser:
(i) a certificate representing the shares of RSSW Common
Stock owned by such Seller, duly endorsed in blank, or accompanied by
duly executed stock powers, by such Seller, with all necessary
transfer tax and other revenue stamps, acquired at Seller's expense,
affixed and cancelled;
(ii) an estoppel certificate executed by each Lessor
certifying that each Lease is in full force and effect and no default
by the tenant thereunder exists as of the date of this Agreement (the
"RoseStar Agreement"); and
(iii) all other agreements, instruments and/or documents to
be delivered by Purchaser to Sellers pursuant to this Agreement.
(b) VGI shall have executed and delivered an Amended and Restated
Management Agreement (herein so called) with RoseStar substantially in the form
attached as "Exhibit A" to the RoseStar-Varma Agreement.
(c) Sellers shall have sold all of the outstanding membership
interests of RoseStar owned by them to Purchaser as of the Closing Date.
(d) Each Seller shall have received from the Lessors a release
from any and all matters relating to or connected with the Leases through the
Closing Date and a release from every Limited Guaranty Agreement relating to
the Leases.
(e) Sellers shall have executed and delivered a Mutual Release in
substantially the form attached as "Exhibit B" to the RoseStar-Varma Agreement.
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(f) The transactions contemplated by that certain Amended and
Restated Crescent-Varma Resolution Agreement, dated July 31, 1997, among
Sellers, VGI, Johanna Varma and Crescent Partnership shall have closed.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS AND ROSESTAR
To induce Purchaser to enter into this Agreement and to consummate the
transactions contemplated hereby, Sellers jointly and severally represent and
warrant as follows:
Section 2.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER.
To the knowledge of Sellers, RSSW is a corporation duly incorporated, validly
existing and in good standing under the laws of the state of Delaware, and, to
the knowledge of Sellers, has all corporate powers and all material
governmental licenses, authorizations, licenses, permits, consents and
approvals (collectively, "Governmental Authorizations") required to carry on
the business in which it is engaged and to own and use the properties owned and
used by it, except such Governmental Authorizations the absence of which would
not have a Material Adverse Effect (as hereinafter defined). Sellers have
delivered to Purchaser true and complete copies of the certificate of
Incorporation and Bylaws, each of which reflect all amendments made thereto at
any time prior to the date of this Agreement. To the knowledge of Sellers,
RSSW is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned or
leased by it, the employment of its employees or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
would not have a Material Adverse Effect on RSSW. To the knowledge of Sellers,
the stock record books of RSSW and the stock shareholder lists of RSSW (copies
of which Sellers have previously furnished to Purchaser) are complete and
correct in all respects and accurately reflect the record ownership and, to the
knowledge of Sellers, the beneficial ownership of all the outstanding shares of
RSSW's capital stock and all other securities issued by RSSW. To the knowledge
of Sellers, RSSW is not in default or in violation of any restriction, lien,
encumbrance, indenture, contract, lease, sublease, loan agreement, note or
other obligation or liability by which it is bound or to which any of its
assets is subject except such defaults or violations which would not have a
Material Adverse Effect on RSSW. For purposes of this Agreement, a "Material
Adverse Effect," with respect to any person or entity (including without
limitation RoseStar, any Subsidiary and/or Purchaser), means a material adverse
effect on the condition (financial or otherwise), business, properties, assets,
liabilities (including contingent liabilities), results of operations or
prospects of such person or entity and the affiliated companies and
subsidiaries and/or parent corporation and/or corporations of such person or
entity under the same ownership, taken as a whole; and "Material Adverse
Change" means a change or a development which has resulted or will result in a
Material Adverse Effect.
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<PAGE> 8
SECTION 2.2 AUTHORIZATION. (a) This Agreement and the
agreements, instruments and documents contemplated hereby which are to be
executed by Sellers have been duly executed and delivered by each Seller and
constitute, or upon execution and delivery by each Seller will constitute,
valid and binding agreements of such Seller, enforceable against him, in each
case, in accordance with their respective terms, except as such enforcement may
be limited by bankruptcy, insolvency or other similar laws effecting the
enforcement of creditors' rights generally or by general principles of equity.
SECTION 2.3 GOVERNMENTAL AUTHORIZATION. To the knowledge of
Sellers, none of the execution and delivery by Sellers of this Agreement or the
agreements, instruments and documents contemplated hereby, the performance by
Sellers of their respective obligations hereunder and thereunder or the
consummation by Sellers of the transactions contemplated hereunder and
thereunder requires any filing by RSSW or Sellers with any governmental body,
agency, official or authority.
SECTION 2.4 NON-CONTRAVENTION. To the knowledge of Sellers, none
of the execution and delivery by Sellers of this Agreement or the agreements,
instruments and documents contemplated hereby, the performance by Sellers of
their respective obligations hereunder and thereunder or the consummation by
Sellers of the transactions contemplated hereunder and/or thereunder does or
will:
(a) contravene or conflict with RSSW's Certificate of
Incorporation or Bylaws;
(b) contravene or conflict with or constitute a violation of
any provision of any law, regulation, judgment, injunction, order, decree,
governmental permit or license or statute to which RSSW and/or any Seller is a
party or by which RSSW and/or any Seller is bound;
(c) violate, breach, be in conflict with or constitute a default
(or an event that, with notice or lapse of time or both, would constitute a
default) under any material note, bond, indenture, mortgage, deed of trust,
lease, franchise, permit, authorization, license, contract, instrument or other
agreement or commitment to which RSSW or any Seller is a party or by which RSSW
or any of its assets or properties is bound or encumbered;
(d) result in a contractual right to cause the termination or
cancellation of or loss of a material benefit under, or the right to accelerate
any obligations pursuant to, any material note, bond, indenture, mortgage, deed
of trust, lease, franchise, permit, authorization, license, contract,
instrument or other agreement or commitment to which RSSW is a party or which
is binding upon RSSW or any material license, franchise, permit or other
similar authorization held by RSSW; or
(e) result in the creation or imposition of any Lien (as
hereinafter defined) upon any properties, assets or business of RSSW;
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<PAGE> 9
except, with respect to clauses (b), (c), (d) and (e) above, for
contraventions, defaults, losses, Liens and other matters referred to in such
clauses that in the aggregate could not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect on RSS/W. For
purposes of this Agreement, the term "Lien" means, with respect to any asset,
any mortgage, lien, pledge, charge, security interest or encumbrance of any
kind in respect of such asset.
SECTION 2.5 TITLE. As of the date hereof, the authorized
capital stock of RSSW consists solely of 10,000 shares of RSSW Common Stock, of
which 1,000 shares are issued and outstanding. All of the issued and
outstanding shares of RSSW Common Stock are owned (of record and beneficially)
by Sellers and as of the Closing Date will be owned (of record and
beneficially) by Sellers as described in Section 1.1 hereof, free and clear of
all Liens or other encumbrances. Upon consummation of the transactions
contemplated by this Agreement and the agreements, instruments and documents
contemplated hereby, Purchaser will acquire all of the outstanding RSSW Common
Stock free and clear of any Liens or encumbrances of any nature. The RSSW
Common Stock has been duly authorized and is validly issued. The RSSW Common
Stock has been issued and purchased in compliance with all applicable laws,
rules and regulations, including, without limitation, all applicable securities
laws, rules and regulations.
SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES. To the knowledge of
Sellers, RSSW does not own any equity interest in any entity, is not a party to
any partnership (limited or general), joint venture or similar agreement and is
not obligated to purchase any equity interest in or any interest convertible
into or exchangeable for an equity interest in any entity or to enter into any
such agreement.
SECTION 2.7 ROSESTAR FINANCIAL STATEMENTS. Sellers have
delivered to Purchaser the following financial information: RoseStar and
Vintage Resorts Hotels Consolidated Cash Flows, RoseStar Management LLC and
RoseStar Southwest, LLC 10 Year Forecast and Vintage Resorts, LLC 10 Year
Forecast, each of which includes actual results of operations for the twelve
month period ended December 31, 1996, and RoseStar Management LLC 1997
Forecasted Cash Flow Statement which includes actual results of operations
through May 31, 1997 (collectively, the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the period covered thereby and
present fairly in all material respects the financial condition of RoseStar as
of December 31, 1996 and the results of its operations and changes in cash
flows for such period. With respect to the forecasted information contained in
the Financial Statements, such forecasts are, to the knowledge and belief of
Sellers, based upon reasonable assumptions. Since December 31, 1996, there
have been no changes in RoseStar's methods of accounting for tax or financial
statement purposes.
SECTION 2.8 BUSINESS ACTIVITY. The purpose and business of RSSW
is to serve as the managing member of RoseStar and to enter into such
agreements and engage in such activities
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<PAGE> 10
that are incidental to or connected with RSSW's obligations as the managing
member of RoseStar. RSSW has not engaged in any other business activities.
SECTION 2.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in
the Financial Statements, on Schedule 2.9 or in the RoseStar-Varma Agreement,
since December 31, 1996, to the knowledge of Sellers, RSSW has in all material
respects conducted its business in the ordinary course, consistent with past
practices, and there has not been:
(a) any Material Adverse Change affecting RSSW.
(b) any loan to or other transaction (excluding transactions
related to the performance of services as an officer, manager or employee)
outside the ordinary course of business with any officer, manager, employee or
stockholder of RSSW giving rise to any claim or right of RSSW against any such
person or of such person against RSSW;
(c) any damage, destruction or other property or casualty loss
(whether or not covered by insurance) affecting the business, assets,
liabilities, earnings or prospects of RSSW which, individually or in the
aggregate, has had or may reasonably be expected to have a Material Adverse
Effect on RSSW;
(d) any increase in indebtedness for borrowed money or capitalized
lease obligations of RSSW;
(e) any sale, assignment, transfer or other disposition of any
tangible or intangible asset material to the business of RSSW;
(f) any amendment, termination or waiver by RSSW of any right of
substantial value under any material note, bond, indenture, mortgage, deed of
trust, lease, franchise, permit, authorization, license, contract, instrument
or other agreement or commitment to which RSSW is a party or which is binding
upon RSSW or any material license, franchise, permit or other similar
authorization held by RSSW;
(g) any material reduction in the amounts of coverage provided by
existing casualty and liability insurance policies with respect to the business
or properties of RSSW;
(h) any (i) grant of any severance or termination pay to any
director, officer or employee of RSSW, (ii) entering into of any employment,
deferred compensation or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of RSSW, (iii) any
increase in benefits payable under any existing severance or termination pay
policies or employment agreements of RSSW, or (iv) any increase in
compensation, bonus or other benefits payable to directors, officers or
employees of RSSW;
(i) any adoption of or amendment to or alteration of any bonus,
incentive, compensation, severance, stock option, stock appreciation right,
pension, matching gift, profit-
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<PAGE> 11
sharing, employee stock ownership, retirement, pension, group insurance, death
benefit, or other fringe benefit plan, arrangement or trust agreement in which
the employees, officers or directors of RSSW;
(j) any capital expenditure, capital addition or capital
improvement incurred or undertaken by RSSW;
(k) any other transaction or commitment entered into other than
in the ordinary course of business by RSSW;
(l) the entering into of any agreement by RSSW or any person on
behalf of RSSW to take any of the foregoing actions.
SECTION 2.10 NO UNDISCLOSED LIABILITIES. To the knowledge of
Sellers, RSSW has no material debt, liability or obligation of any nature,
whether accrued, absolute, contingent or otherwise, known or unknown, whether
due or to become due, except to the extent set forth in the Financial
Statements or as set forth on Schedule 2.10.
SECTION 2.11 LITIGATION. Schedule 2.11 sets forth any instances
in which (a) RSSW is subject to any judgment or order (other than orders of
general applicability) of any court or quasi-judicial or administrative agency
of any jurisdiction, domestic or foreign, or where there is any charge,
complaint, lawsuit or governmental investigation pending or threatened in
writing against RSSW or (b) RSSW is a plaintiff in any action, domestic or
foreign, judicial or administrative in which a counterclaim against RSSW is
pending.
SECTION 2.12 TAX RETURNS AND AUDITS. The taxable year of RSSW
ends December 31. To the knowledge of Sellers, RSSW has duly and timely filed
or caused to be filed all federal, foreign, state and local income, franchise,
sales and use, value added, property, employment, excise, informational or any
other tax return (the "Tax Returns") required to be filed by them and has paid
in full or fully reserved against in the Financial Statements all taxes,
interest, penalties, assessments and deficiencies due or claimed to be due by
them to foreign, federal, state or local taxing authorities (including taxes on
properties, income, franchises, licenses, sales, use and payrolls). To the
knowledge of Sellers, such Tax Returns are correct, and RSSW is required to pay
any taxes for such periods except as shown in such Tax Returns. RSSW is not a
United States real property holding corporation as defined in Section 897 of
the Internal Revenue Code of 1986, as amended (the "Code"). No stockholder of
RSSW is a foreign person within the meaning of Section 1445(b)(2) of the Code.
SECTION 2.13 MATERIAL AGREEMENTS.
(a) Schedule 2.14 includes a complete and accurate list of all
contracts, agreements, leases (other than the Leases), and instruments (true
and complete copies of which have been delivered to Purchaser) to which RSSW is
a party or by which they or their properties or assets
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<PAGE> 12
are bound which are material to the operations, assets or business of RSSW or
which individually involve net payments or receipts in excess of $100,000 per
annum.
(b) To the knowledge of Sellers, neither RSSW nor any other party
is in default under any Material Agreement and no event has occurred which
(after notice or lapse of time or both) would become a breach or default under,
or would permit the modification, cancellation or termination of or the
acceleration of any obligation under any Material Agreement or result in the
creation of any Lien upon, or any person obtaining any right to acquire, any
properties, assets or rights of RSSW, which, in any such case, has had or would
reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of Sellers, each such Material Agreement is
in full force and effect and is valid and legally binding and there are no
material unresolved disputes involving or with respect to any such Material
Agreement. No party to a Material Agreement has advised RSSW or Sellers that
it intends either to terminate a Material Agreement or to refuse to renew a
Material Agreement upon the expiration of the term thereof.
SECTION 2.14 PROPERTIES.
(a) RSSW owns no real estate. Other than the Leases, neither
RoseStar nor any Subsidiary is a party to or bound by a lease of real property.
To the knowledge of Sellers, with respect to each Lease: (a) the Lease has been
validly executed and delivered by RoseStar or the applicable Subsidiary and, to
the knowledge of RoseStar and Sellers, by the other party or parties thereto
and is a binding agreement; (b) neither RoseStar nor the applicable Subsidiary,
and to the knowledge of RoseStar and Sellers, no other party to the lease is in
material breach or default, and no event has occurred on the part of RoseStar
or the applicable Subsidiary or, to the knowledge of RoseStar and Sellers, on
the part of any other party which, with notice or lapse of time, would
constitute such a breach or default or permit termination, modification or
acceleration under the lease; (c) the lease will continue to be binding in
accordance with its terms following the Closing; (d) neither RoseStar nor the
applicable Subsidiary has repudiated and, to the knowledge of RoseStar and
Sellers, no other party to the lease has repudiated any provision thereof; (e)
there are no disputes, oral agreements or delayed payment programs in effect as
to the lease; and (f) all facilities leased thereunder have been approved by
all necessary governmental authorities, have been maintained in accordance with
normal industry practice and are in good condition, working order and repair.
(b) To the knowledge of Sellers, RSSW has good and marketable
title to, or a valid leasehold interest in, each item of tangible property,
whether real, personal or mixed, reflected on its books and records as owned or
used by it, subject to no Liens or encumbrances of any nature.
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SECTION 2.15 ENVIRONMENTAL MATTERS.
(a) For the purposes of this Agreement, the following terms have
the following meanings:
"Environmental Laws" shall mean any and all federal, state,
local and foreign statutes, laws (including case law), regulations,
ordinances, rules, judgments, orders, decrees, codes, plans,
injunctions, permits, concessions, grants, franchises, licenses,
agreements and governmental restrictions relating to human health, the
environment or to emissions, discharges or releases of Hazardous
Substances (as hereinafter defined) into the environment or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Substances or
the clean-up or other remediation thereof.
"Environmental Liabilities" shall mean all liabilities,
whether vested or unvested, contingent or fixed, actual or potential,
which (i) arise under or relate to Environmental Laws and (ii) relate
to actions occurring or conditions existing on or prior to the Closing
Date.
"Hazardous Substances" shall mean any chemical, pollutant,
contaminant, material, solid waste, hazardous waste or combination
thereof, including, without limitation, (i) any toxic, radioactive,
caustic or otherwise hazardous substance, (ii) petroleum and its
derivatives, by-products and other hydrocarbons, and (iii)
polychlorinated biphenyls, asbestos, lead and radon gas, whether
solid, liquid or gaseous in nature, which poses or may pose a hazard
to human health or the environment.
"Regulated Activity" shall mean any generation, treatment,
storage, recycling, transportation, disposal, release or remediation
of any Hazardous Substances.
(b) To the knowledge of Sellers, no notice, notification, demand,
request for information, citation, summons, complaint or order has been
received by RSSW or Sellers, no complaint has been filed, no penalty has been
assessed and no investigation or review is pending, or to the knowledge of
Sellers, has been threatened by any governmental entity or other party with
respect to any (i) alleged violation by RSSW of any Environmental Law, (ii)
alleged failure by RSSW to have any environmental permit, certificate, license,
approval, registration or authorization required in connection with the conduct
of its business or (iii) the participation by RSSW in any Regulated Activity.
(c) To the knowledge of Sellers, RSSW has no material
Environmental Liabilities and there has been no release of Hazardous Substances
into the environment by RSSW or with respect to any of their properties which
has had, or would reasonably be expected to have, a Material Adverse Effect on
RSSW.
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SECTION 2.16 GUARANTEES. To the knowledge of Sellers, RSSW is not
a guarantor or otherwise liable for any indebtedness of any other person, firm
or corporation other than endorsements for collection in the ordinary course of
business.
SECTION 2.17 POWERS OF ATTORNEY. To the knowledge of Sellers,
there are no outstanding powers of attorney or similar instruments executed by
RSSW.
SECTION 2.18 COMPLIANCE WITH LAWS. To the knowledge of Sellers,
RSSW and each of its respective directors, officers and employees (the
individuals only in their capacities as representatives of such entities) have
complied, in all material respects, with all applicable laws and regulations of
foreign, federal, state, provincial and local governments and all agencies
thereof, including Environmental Laws, and no claim has been filed or
threatened in writing against RSSW alleging a violation of any such laws or
regulations.
SECTION 2.19 NO PROCEEDINGS. To the knowledge of Sellers, there
is no legal action or governmental proceeding or investigation pending or, to
the knowledge of Sellers and RSSW, threatened against Sellers or RSSW that
would adversely affect or prevent the consummation of the transactions
contemplated by this Agreement or the agreements, instruments or documents
contemplated hereby, nor are RSSW or Sellers subject to any outstanding order
of any court or governmental authority that could adversely affect or prevent
the consummation of the transactions contemplated by this Agreement or the
agreements, instruments or documents contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
To induce Sellers to enter into this Agreement and to consummate the
transactions contemplated hereby, Purchaser represents and warrants as follows:
SECTION 3.1 CORPORATE EXISTENCE AND GOOD STANDING. Purchaser is
a corporation duly organized, validly existing and in good standing under the
laws of the state of Delaware.
SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and
performance by Purchaser of this Agreement and the agreements, instruments and
documents contemplated hereby which are to be executed by Purchaser, and the
consummation by Purchaser of the transactions contemplated hereby and thereby
are within the corporate powers of Purchaser and have been duly authorized by
all necessary action of the shareholders and directors of Purchaser. This
Agreement and the agreements, instruments and documents contemplated hereby
which are to be executed by Purchaser have been duly executed and delivered by
Purchaser and constitute, or upon execution and delivery by Purchaser will
constitute, valid and binding agreements of Purchaser enforceable against
Purchaser in each case in accordance with their respective terms, except as
such enforcement may be limited by bankruptcy, insolvency
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<PAGE> 15
or other similar laws affecting the enforcement of creditors' rights generally
or by general principles of equity.
SECTION 3.3 GOVERNMENTAL AUTHORIZATION. To the knowledge of
Purchaser, none of the execution and delivery by Purchaser of this Agreement or
the agreements, instruments and documents contemplated hereby, the performance
by Purchaser of its obligations hereunder and thereunder or the consummation by
Purchaser of the transactions contemplated hereunder or thereunder requires any
filing by Purchaser with any governmental body, agency, official or authority.
SECTION 3.4 NON-CONTRAVENTION. To the knowledge of Purchaser,
none of the execution and delivery by Purchaser of this Agreement and the
agreements, instruments or documents contemplated hereby, the performance by
Purchaser of its obligations hereunder and thereunder or the consummation by
Purchaser of the transactions contemplated hereunder or thereunder does or
will:
(a) contravene or conflict with the Certificate of Incorporation
or Bylaws of Purchaser; or
(b) contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree,
governmental permit or license or statute to which Purchaser is a party or by
which Purchaser is bound.
SECTION 3.5 NO PROCEEDINGS. To the knowledge of Purchaser, there
is no legal action or governmental proceeding or investigation pending or, to
the knowledge of Purchaser, threatened against Purchaser that would adversely
affect or prevent the consummation of the transactions contemplated by this
Agreement and the agreements, instruments and documents contemplated hereby,
nor is Purchaser subject to any outstanding order of any court or governmental
authority that could adversely affect or prevent the consummation of the
transactions contemplated by this Agreement and the agreements, instruments and
documents contemplated hereby.
ARTICLE IV
ADDITIONAL AGREEMENTS OF THE PARTIES
SECTION 4.1 PRESS RELEASES. Purchaser and Sellers shall consult
with each other as to the form and substance of any press release or other
public disclosure of matters related to this Agreement or any of the
transactions contemplated hereby; provided, however, that nothing in this
Section shall be deemed to prohibit any party hereto from making any disclosure
that is required to fulfill such party's disclosure obligations imposed by law,
including, without limitation, federal, state or provincial securities laws.
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SECTION 4.2 TAX COOPERATION. Purchaser and Sellers shall
cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any gains, sales,
use, transfer or value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes or fees which
become payable in connection with the transactions contemplated by this
Agreement that are required or permitted to be filed at any time before or
after the Closing Date. Purchaser and Sellers shall not take inconsistent
reporting positions with the IRS with respect to the transactions contemplated
by this Agreement. Purchaser agrees not to amend any tax positions with
respect to RoseStar taken prior to the date of this Agreement other than such
amendments as may be required in the opinion of Purchaser's legal counsel in
order to comply with the Code.
SECTION 4.3 DEFINITION OF KNOWLEDGE. For purposes of this
Agreement, "to the knowledge of Sellers" shall mean the actual knowledge
without any duty of independent investigation of each Seller on an individual
basis, i.e., no individual Seller shall be responsible for the representations
and warranties made by any other Seller.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 FURTHER ASSURANCES. Each party agrees to
cooperate fully with the other parties and to execute such further
instruments, documents and agreements and to give such further written
assurances as may be reasonably requested by any other party to better evidence
and reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
SECTION 5.2 FEES AND EXPENSES. Until otherwise agreed by the
parties, each party shall bear its own fees and expenses, including, without
limitation, counsel fees and fees of brokers and investment bankers contracted
by such party, in connection with the transaction contemplated hereby.
SECTION 5.3 NOTICES. All notices, demands, requests or other
communications that may be or are required to be given, served or sent by
either party to the other party pursuant to this Agreement will be in writing
and will be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, telegram or
facsimile transmission addressed as follows:
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(a) If to Purchaser: Crescent Operating, Inc.
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 339-1001
Attn.: Jeffrey L. Stevens, Treasurer,
Chief Financial Officer and
Secretary
with a copy (which
will not constitute
notice) to: Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Facsimile Transmission No.: (214) 745-5390
Attn.: Thomas R. Helfand, Esq.
(b) If to Haddock: Gerald W. Haddock
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 878-0429
(c) If to Goff: John C. Goff
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 820-6650
(d) If to Varma: Sanjay Varma
777 Main Street, Suite 2680
Fort Worth, Texas 76102
Facsimile Transmission No.: (817) 820-0469
Either party may designate by written notice a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above will be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a facsimile transmission) the answer back being
deemed conclusive evidence of such delivery or at such time as delivery is
refused by the addressee upon presentation.
SECTION 5.4 APPLICABLE LAW. THIS AGREEMENT AND THE AGREEMENTS,
INSTRUMENTS AND DOCUMENTS CONTEMPLATED HEREBY WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE
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STATE OF TEXAS (EXCLUSIVE OF CONFLICTS OF LAW PRINCIPLES) AND WILL, TO THE
MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN TARRANT
COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION OVER
ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY,
ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE AGREEMENTS, INSTRUMENTS
AND DOCUMENTS CONTEMPLATED HEREBY. THE PARTIES CONSENT TO AND AGREE TO SUBMIT
TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE, WHETHER IN
FEDERAL OR STATE COURT, WILL BE LAID IN DALLAS COUNTY, TEXAS. EACH OF THE
PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY IS
NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY AND
SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH COURTS OR
(III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN INCONVENIENT
FORUM.
SECTION 5.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT.
This Agreement and the provisions hereof shall be binding upon each of the
parties, their permitted successors and assigns. This Agreement may not be
assigned by any party without the prior consent of the other; provided,
however, that Purchaser may assign all or any portion of its rights and
delegate all or any portion of its obligations under this Agreement to any
wholly owned subsidiary of Purchaser; provided that Purchaser will remain
jointly and severally liable for the performance of Purchaser's obligations
hereunder.
SECTION 5.6 SEVERABILITY. If any provision of this Agreement, or
the application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances shall continue in full force and
effect and in no way be affected, impaired or invalidated.
SECTION 5.7 ENTIRE AGREEMENT. This Agreement, together with the
agreements,instruments and documents contemplated hereby constitute the entire
understanding and agreement of the parties with respect to the subject matter
hereof and thereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between parties with respect to such subject matter.
SECTION 5.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties and covenants contained in this Agreement shall
survive the consummation of the transactions contemplated hereby.
SECTION 5.9 AMENDMENT AND WAIVERS. No amendment of any provision
of this Agreement shall be valid unless the same shall be in writing and signed
by the parties hereto.
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No waiver by any part of any default, misrepresentation or breach of warranty
or covenant hereunder, whether intentional or not, shall not be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.
SECTION 5.10 NO WAIVER. The failure of any party to enforce any
of the provisions hereof shall not be construed to be a waiver of the right of
such party thereafter to enforce such provisions.
SECTION 5.11 CONSTRUCTION OF AGREEMENT. A reference to an
Article, Section or an Exhibit shall mean an Article of, a Section in, or
Exhibit to, this Agreement unless otherwise explicitly set forth. The titles
and headings herein are for reference purposes only and shall not in any manner
limit the construction of this Agreement which shall be considered as a whole.
The words "include," "includes" and "including" when used herein shall be
deemed in each case to be followed by the words "without limitation."
SECTION 5.12 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against any party
whose signature appears thereon and all of which together shall constitute one
and the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all the parties reflected hereon as signatories.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CRESCENT OPERATING, INC.
By:
----------------------------------------------
Jeffrey L. Stevens, Treasurer,
Chief Financial Officer and Secretary
-----------------------------------------------------
Gerald W. Haddock
-----------------------------------------------------
John C. Goff
-----------------------------------------------------
Sanjay Varma
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<PAGE> 1
EXHIBIT 10.29
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made and entered into as
of the _____ day of ____________, by Crescent Operating, Inc., a Delaware
corporation, (referred to herein as the "Company") and_______________, an
officer and director of the Company (the "Indemnitee").
W I T N E S S E T H:
WHEREAS, the interpretation of ambiguous statutes, regulations and bylaws
regarding indemnification of officers and directors may be too uncertain to
provide such officers and directors with adequate notice of the legal, financial
and other risks to which they may be exposed by virtue of their service as such;
and
WHEREAS, damages sought against officers and directors in stockholder or
similar litigation by class action plaintiffs may be substantial, and the costs
of defending such actions and of judgments in favor of plaintiffs or of
settlement therewith may be prohibitive for individual officers and directors,
without regard to the merits of a particular action and without regard to the
culpability of, or the receipt of improper personal benefit by, any named
officer or director to the detriment of the corporation; and
WHEREAS, the issues in controversy in such litigation usually relate to
the knowledge, motives and intent of the officer or director, who may be the
only person with first-hand knowledge of essential facts or exculpating
circumstances who is qualified to testify in his defense regarding matters of
such a subjective nature, and, the long period of time which may elapse before
final disposition of such litigation, may impose undue hardship and burden on an
officer or director or his estate in launching and maintaining a proper and
adequate defense of himself or his estate against claims for damages; and
WHEREAS, the Company is organized under the Delaware General Corporation
Law (the "DGCL"), and Section 145 of the DGCL empowers corporations to indemnify
and advance expenses of litigation to a person serving as an officer, director,
employee or agent of a corporation and to persons serving at the request of the
corporation, while a director of a corporation, as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, and further
provides that the indemnification and advancement of expenses set forth in said
section shall not be deemed "exclusive of any other rights, by indemnification
or otherwise, to which those [directors and officers] seeking indemnification
and expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors"; and
WHEREAS, the First Amended and Restated Certificate of Incorporation of
the Company, as they may be amended or amended and restated from time to time
(the "Charter"), provides that (subject to certain qualifications) the Company
shall indemnify current and former officers and
<PAGE> 2
directors to the full extent permitted by the DGCL, as it may be amended from
time to time; and the First Amended and Restated Bylaws of the Company provide
that the Company "shall indemnify its officers and directors to the full extent
permitted by the General Corporation Law of the State of Delaware as such may be
amended from time to time"; and
WHEREAS, Section 145(f) of the DGCL provides that the indemnification and
expense advancement provided by or granted pursuant to Section 145 are not
exclusive of any other rights of indemnification and expense advancement
Indemnitee may be entitled under the Bylaws, any agreement (including this
Agreement), vote of stockholders, vote of disinterested directors, or otherwise,
although judicial interpretation of that nonexclusivity provision does not
permit a corporation to indemnify without regard to limitations set forth in
other subsections of Section 145 and any indemnification rights provided beyond
statutory provisions must be consistent with substantive provisions of Section
145; and
WHEREAS, the Board of Directors of the Company (the "Board") has
concluded that it is reasonable and prudent for the Company contractually to
obligate itself to indemnify in a reasonable and adequate manner the Indemnitee
and to assume for itself maximum liability for expenses and damages in
connection with claims lodged against the Indemnitee for the Indemnitee's
decisions and actions as a director and/or officer or both of the Company;
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and sufficiency of which are acknowledged by
each of the parties hereto, the parties agree as follows:
I.
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
A. "BOARD" shall mean the Board of Directors of the Company.
B. "CHANGE IN CONTROL" shall mean a change in the ownership or power to
direct the Voting Securities of the Company or the acquisition by a person not
affiliated with the Company of the ability to direct the management of the
Company.
C. "CORPORATE STATUS" shall mean the status of a person who is or was a
director, officer, employee or agent of the Company, or a member of any
committee of the Board, a director, officer, employee or agent of any past,
present or future direct or indirect subsidiary of the Company, a director,
officer, employee or agent of any predecessor of the Company in a merger,
consolidation, or other transaction in which the liabilities of the predecessor
are transferred to the Company by operation of law and in any other transaction
in which the Company assumes the liabilities of the predecessor but does not
specifically exclude liabilities to
2
<PAGE> 3
indemnify persons as contemplated hereby, and the status of a person who, while
a director or officer of the Company, is or was serving at the request of the
Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, other
incorporated or unincorporated entity or enterprise or employee benefit plan.
D. "DISINTERESTED DIRECTOR" shall mean a director of the Company who, at
the time of the vote, is not a named defendant, respondent or otherwise a party
in or to the Proceeding in respect of which indemnification is being sought by
the Indemnitee.
E. "EXPENSES" shall mean any and all expenses of Proceedings, including,
without limitation, all attorneys' fees, retainers, court costs, transcript
costs, fees of experts, investigation fees and expenses, accounting and witness
fees, travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating or being or preparing to be a
witness in a Proceeding.
F. "GOOD FAITH ACT OR OMISSION" shall mean an act or omission of the
Indemnitee other than (i) one committed in bad faith or that was the result of
the Indemnitee's active or deliberate dishonesty; (ii) one from which the
Indemnitee actually received an improper personal benefit in money, property or
services; or (iii) in the case of a criminal Proceeding, one as to which the
Indemnitee had cause to believe his conduct was unlawful.
G. "LIABILITIES" shall mean liabilities of any type whatsoever,
including, without limitation, any judgments, fines, excise taxes and penalties
under the Employee Retirement Income Security Act of 1974, as amended, penalties
and amounts paid in settlement (including all interest, assessments and other
charges paid or payable in connection with or in respect of such judgments,
fines, penalties or amounts paid in settlement) in connection with the
investigation, defense, settlement or appeal of any Proceeding or any claim,
issue or matter therein.
H. "PROCEEDING" shall mean any threatened, pending or completed action,
suit, proceeding, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing, or any other actual, threatened or
completed proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal or appeals therefrom, and any inquiry or investigation
that could lead to any of the foregoing.
I. "VOTING SECURITIES" shall mean any securities of the Company that are
entitled to vote generally in the election of directors.
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<PAGE> 4
II.
TERM OF AGREEMENT
This Agreement shall continue until, and terminate upon the later to
occur of (i) the death of the Indemnitee; or (ii) the final termination of all
Proceedings (including possible Proceedings) in respect of which the Indemnitee
is granted rights of indemnification or advancement of Expenses hereunder and of
any Proceeding commenced by the Indemnitee regarding the interpretation or
enforcement of this Agreement.
III.
NOTICE OF PROCEEDINGS, DEFENSE OF CLAIMS
A. NOTICE OF PROCEEDINGS. The Indemnitee agrees to notify the Company
promptly in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder, but the Indemnitee's omission to so notify the Company shall
not relieve the Company from any liability which it may have to the Indemnitee
under this Agreement.
B. DEFENSE OF CLAIMS. The Company will be entitled to participate, at the
expense of the Company in any Proceeding of which the Company has notice. The
Company will be entitled to assume the defense of the Indemnitee therein, with
counsel reasonably satisfactory to the Indemnitee; provided, however, that the
Company shall not be entitled to assume the defense of the Indemnitee in any
Proceeding if there has been a Change in Control or if the Indemnitee has
reasonably concluded that there may be a conflict of interest between the
Company and the Indemnitee with respect to such Proceeding. The Company will not
be liable to the Indemnitee under this Agreement for any Expenses incurred by
the Indemnitee in connection with the defense of any Proceeding, other than
reasonable costs of investigation or as otherwise provided below, after notice
from the Company to the Indemnitee of its election to assume the defense of the
Indemnitee therein. The Indemnitee shall have the right to employ his own
counsel in any such Proceeding, but the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of the Indemnitee unless (i) the employment of counsel
by the Indemnitee has been authorized by the Company; (ii) the Indemnitee shall
have reasonably concluded that counsel employed by the Company may not
adequately represent the Indemnitee and shall have so informed the Company; or
(iii) the Company shall not in fact have employed counsel to assume the defense
of the Indemnitee in such Proceeding or such counsel shall not, in fact, have
assumed such defense or such counsel shall not be acting, in connection
therewith, with reasonable diligence; and in each such case the fees and
expenses of the Indemnitee's counsel shall be advanced by the Company.
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<PAGE> 5
C. SETTLEMENT OF CLAIMS. The Company shall not settle any Proceeding in
any manner which would impose any liability, penalty or limitation on the
Indemnitee without the written consent of the Indemnitee; provided, however,
that the Indemnitee will not unreasonably withhold or delay consent to any
proposed settlement. The Company shall not be liable to indemnify the Indemnitee
under this Agreement or otherwise for any amounts paid in settlement of any
Proceeding effected by the Indemnitee without the Company's written consent,
which consent shall not be unreasonably withheld or delayed.
IV.
INDEMNIFICATION
A. IN GENERAL. Upon the terms and subject to the conditions set forth in
this Agreement, the Company to the fullest extent required or permitted by
applicable law in effect on the date hereof and to such greater extent as
applicable law may hereafter from time to time require or permit shall hold
harmless and indemnify the Indemnitee against any and all Liabilities and
Expenses actually incurred by or for the Indemnitee in connection with any
Proceeding in which the Indemnitee is or becomes involved as a party, a witness
or otherwise is a participant in any role either by reason of the Indemnitee's
Corporate Status. For all matters for which the Indemnitee is entitled to
indemnification under this Article IV, the Indemnitee shall be entitled to
advancement of Expenses in accordance with Article V hereof.
B. INDEMNIFICATION OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL.
Notwithstanding any other provision of this Agreement, to the extent that the
Indemnitee is successful, on the merits or otherwise, in any Proceeding
described in A above, the Indemnitee shall be indemnified by the Company to the
maximum extent consistent with law, against all Expenses and Liabilities
actually incurred by or for him in connection therewith. If the Indemnitee is
not wholly successful in such Proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
Proceeding, the Company shall hold harmless and indemnify the Indemnitee to the
maximum extent consistent with law, against all Expenses and Liabilities
actually incurred by or for him in connection with each successfully resolved
claim, issue or matter in such Proceeding. Resolution of a claim, issue or
matter by dismissal, with or without prejudice, shall be deemed a successful
result as to such claim, issue or matter, so long as there has been no finding
(either adjudicated or pursuant to Article VI hereof) that the act(s) or
omissions) of the Indemnitee giving rise thereto was not a Good Faith Act(s) or
Omission(s).
C. INDEMNIFICATION FOR EXPENSES OF WITNESS. Notwithstanding any other
provision of this Agreement, to the extent that the Indemnitee, by reason of the
Indemnitee's Corporate Status, has prepared to serve or has served as a witness
in any Proceeding, or has participated in discovery proceedings or other trial
preparation, the Indemnitee shall be held harmless and indemnified against all
Expenses actually incurred by or for the Indemnitee in connection therewith.
5
<PAGE> 6
D. SPECIFIC LIMITATIONS ON INDEMNIFICATION. In addition to the other
limitations set forth in this Article IV, and notwithstanding anything in this
Agreement to the contrary, the Company shall not be obligated under this
Agreement to make any payment to the Indemnitee for indemnification with respect
to any Proceeding (or part thereof):
1. To the extent that payment is actually made to the Indemnitee
under any insurance policy or is made on behalf of the Indemnitee by or
on behalf of the Company otherwise than pursuant to this Agreement;
2. If a court in such Proceeding has entered a judgment or other
adjudication which is final and has become nonappealable and established
that a claim of the Indemnitee for such indemnification arose from: (i)
a breach by the Indemnitee of the Indemnitee's duty of loyalty to the
Company or its stockholders; or (ii) an act(s) or omission(s) of the
Indemnitee that is not a Good Faith Act(s) or Omission(s);
3. If there has been no Change in Control, for Liabilities in
connection with Proceedings settled without the consent of the Company;
or
4. For an accounting of profits made from the purchase or sale by
the Indemnitee of securities of the Company within the meaning of
section 16(b) of the Securities Exchange Act of 1934, as amended, or
similar provisions of any federal, state or local statute or regulation.
V.
ADVANCEMENT OF EXPENSES
Notwithstanding any provision to the contrary in Article VI hereof, the
Company shall advance to the Indemnitee all Expenses which were incurred by or
for the Indemnitee in connection with any Proceeding for which the Indemnitee is
entitled to indemnification pursuant to Article IV hereof, in advance of the
final disposition of such Proceeding, provided that, with respect to Expenses to
be advanced by the Company, the Company receive an undertaking by or on behalf
of the Indemnitee to repay Expenses advanced if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified by the Company
hereunder in such form as may be required under applicable law as in effect at
the time of execution thereof (the "Undertaking"). The Undertaking shall
reasonably evidence the Expenses incurred by or for the Indemnitee and shall
contain a written affirmation by the Indemnitee of his good faith belief that
the standard of conduct necessary for indemnification has been met. The Company
shall advance such expenses within twenty days after the receipt by the Company
of the later of the Undertaking and a statement or statements from Indemnitee
requesting such advance or advances from time to time. The Indemnitee hereby
agrees to repay any Expenses advanced hereunder if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified against such
Expenses. Any
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<PAGE> 7
advances and the undertaking to repay pursuant to this Article V shall be
unsecured and interest free, and shall be made and accepted by the Company
without reference to the Indemnitee's financial ability to make repayment.
VI.
PROCEDURE FOR PAYMENT OF LIABILITIES;
DETERMINATION OF RIGHT TO INDEMNIFICATION
A. PROCEDURE FOR PAYMENT. To obtain indemnification for Liabilities under
this Agreement, the Indemnitee shall submit to the Company a written request for
payment, including with such request such documentation as is reasonably
available to the Indemnitee and reasonably necessary to determine whether, and
to what extent, the Indemnitee is entitled to indemnification and payment
hereunder. Any indemnification payment due hereunder shall be paid by the
Company no later than twenty days following the determination, pursuant to this
Article VI, that such indemnification payment is proper hereunder.
B. NO DETERMINATION NECESSARY WHEN THE INDEMNITEE WAS SUCCESSFUL. To the
extent the Indemnitee has been successful, on the merits or otherwise, in
defense of any Proceeding or in the defense of any claim, issue or matter in
such Proceeding, the Company shall indemnify the Indemnitee against all Expenses
actually incurred by or for the Indemnitee in connection with such Proceeding.
C. DETERMINATION OF GOOD FAITH ACT OR OMISSION. In the event that Section
VI.B. is inapplicable, the Company also shall hold harmless and indemnify the
Indemnitee, except that the Company shall have no liability to the Indemnitee
hereunder if the Company shall prove by clear and convincing evidence to a forum
listed in Section VI.D. below that the act(s) or omission(s) of the Indemnitee
giving rise to the Proceeding was not a Good Faith Act(s) or Omission(s).
D. FORUM FOR DETERMINATION. The Indemnitee shall be entitled to select
from among the following the forum in which the validity of the Company's claim
under Section VI.C. above that the Indemnitee is not entitled to indemnification
will be heard:
1. A quorum of the Board consisting of Disinterested Directors;
2. If such a quorum cannot be obtained, a committee of the Board,
designated to act in the matter by a majority vote of all Directors,
consisting of two or more Directors who are Disinterested Directors;
3. The stockholders of the Company;
4. Legal counsel selected by the Indemnitee, subject to the approval
of the Board, which approval shall not be unreasonably delayed or
denied, which counsel shall make such determination in a written
opinion; or
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<PAGE> 8
5. A panel of three arbitrators, one of whom is selected by the
Company, another of whom is selected by the Indemnitee and the last of
whom is selected jointly by the first two arbitrators so selected.
As soon as practicable, and in no event later than thirty days after written
notice of the Indemnitee's choice of forum pursuant to this Section VI.D., the
Company shall, at the expense of the Company, submit to the selected forum in
such manner as the Indemnitee or the Indemnitee's counsel may reasonably
request, its claim that the Indemnitee is not entitled to indemnification, and
the Company shall act in the utmost good faith to assure the Indemnitee a
complete opportunity to defend against such claim. The fees and expenses of the
selected forum in connection with making the determination contemplated
hereunder shall be paid by the Company. If the Company shall fail to submit the
matter to the selected forum within thirty days after the Indemnitee's written
notice or if the forum so empowered to make the determination shall have failed
to make the requested determination within thirty days after the matter has been
submitted to it by the Company, the requisite determination that the Indemnitee
has the right to indemnification shall be deemed to have been made.
E. RIGHT TO APPEAL. Notwithstanding a determination by any forum listed
in Section VI.D. above that the Indemnitee is not entitled to indemnification
with respect to a specific Proceeding, the Indemnitee shall have the right to
apply to the court in which that Proceeding is or was pending, or to any other
court of competent jurisdiction, for the purpose of enforcing the Indemnitee's
right to indemnification pursuant to this Agreement. Such enforcement action
shall consider the Indemnitee's entitlement to indemnification de novo, and the
Indemnitee shall not be prejudiced by reason of a prior determination that the
Indemnitee is not entitled to indemnification. The Company shall be precluded
from asserting that the procedures and presumptions of this Agreement are not
valid, binding and enforceable. The Company further agrees to stipulate in any
such judicial proceeding that the Company is bound by all the provisions of this
Agreement and is precluded from making any assertion to the contrary.
F. RIGHT TO SEEK JUDICIAL DETERMINATION. Notwithstanding any other
provision of this Agreement to the contrary, at any time after thirty days after
a request for indemnification has been made to the Company (or upon earlier
receipt of written notice that a request for indemnification has been rejected)
and before the third anniversary of the making of such indemnification request,
the Indemnitee may petition a court of competent jurisdiction, whether or not
such court has jurisdiction over, or is the forum in which is pending, the
Proceeding, to determine whether the Indemnitee is entitled to indemnification
hereunder, and such court thereupon shall have the exclusive authority to make
such determination, unless and until such court dismisses or otherwise
terminates the Indemnitee's action without having made such determination. The
court, as petitioned, shall make an independent determination of whether the
Indemnitee is entitled to indemnification hereunder, without regard to any prior
determination in any other forum as provided hereby.
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<PAGE> 9
G. EXPENSES UNDER THIS AGREEMENT. Notwithstanding any other provision in
this Agreement to the contrary, the Company shall indemnify the Indemnitee
against all Expenses incurred by the Indemnitee in connection with any hearing
or proceeding under this Section VI involving the Indemnitee and against all
Expenses incurred by the Indemnitee in connection with any other action between
the Company and the Indemnitee involving the interpretation or enforcement of
the rights of the Indemnitee under this Agreement, even if it is finally
determined that the Indemnitee is not entitled to indemnification in whole or in
part hereunder.
VII.
PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS
A. BURDEN OF PROOF. In making a determination with respect to entitlement
to indemnification hereunder, the person, persons, entity or entities making
such determination shall presume that the Indemnitee is entitled to
indemnification under this Agreement and the Company shall have the burden of
proof to overcome that presumption.
B. EFFECT OF OTHER PROCEEDINGS. The termination of any Proceeding or of
any claim, issue or matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, or an entry of
an order of probation prior to judgment, shall not of itself be determinative
that the act(s) or omission(s) giving rise to the Proceeding were not Good Faith
Act(s) or Omission(s).
C. RELIANCE AS SAFE HARBOR. For purposes of any determination of whether
any act or omission of the Indemnitee was a Good Faith Act or Omission, each act
of the Indemnitee shall be deemed to be a Good Faith Act or Omission if the
Indemnitee's action is based on the records or books of accounts of the Company,
including financial statements, or on information supplied to the Indemnitee by
the officers of the Company in the course of their duties, or on the advice of
legal counsel for the Company, or on information or records given or reports
made to the Company by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Company. The
provisions of this Section VII.C. shall not be deemed to be exclusive or to
limit in any way the other circumstances in which the Indemnitee may be deemed
to have met the applicable standard of conduct set forth in this Agreement or
under applicable law.
D. ACTIONS OF OTHERS. Neither the knowledge, actions, or failure to act,
of any director, officer, agent or employee of the Company shall be imputed to
the Indemnitee for purposes of determining the right to indemnification under
this Agreement.
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VIII.
INSURANCE; OTHER INDEMNIFICATION ARRANGEMENTS
A. INSURANCE. In the event that the Company maintains officers' and
directors' or similar liability insurance to protect itself and any director or
officer of the Company against any expense, liability or loss, such insurance
shall cover the Indemnitee to at least the same degree as each other director
and/or officer of the Company.
B. OTHER ARRANGEMENTS. The Charter and Bylaws of the Company permit the
Company to purchase and maintain insurance or furnish comparable protection or
make other arrangements, including but not limited to providing a trust fund,
letter of credit, or surety bond (collectively, "Indemnification Arrangements")
on behalf of the Indemnitee against any Liability asserted against or incurred
by the Indemnitee or any Expenses incurred by the Indemnitee or on the
Indemnitee's behalf in connection with actions taken or omissions by the
Indemnitee in the Indemnitee's Corporate Status, whether or not the Company
would have the power to indemnify the Indemnitee under this Agreement or under
the DGCL, as it may be in effect from time to time. The purchase, establishment
or maintenance, or any combination thereof, of any such Indemnification
Arrangement shall in no way affect or limit the rights and obligations of the
Indemnitee or the Company hereunder, except as expressly provided herein, and
the execution and delivery of this Agreement by the Indemnitee and the Company
shall in no way affect or limit the rights and obligations of such parties under
or with respect to any other such Indemnification Arrangement.
IX.
OBLIGATIONS OF THE COMPANY UPON A CHANGE IN CONTROL
In the event of a Change in Control, upon written request of the
Indemnitee the Company shall establish a trust for the benefit of the Indemnitee
hereunder (a "Trust") and from time to time, upon written request from the
Indemnitee, shall fund the Trust in an amount sufficient to satisfy all amounts
actually paid hereunder as indemnification for Liabilities or Expenses
(including those paid in advance) or which the Indemnitee reasonably determines
and demonstrates, from time to time, may be payable by the Company hereunder.
The amount or amounts to be deposited in the Trust shall be determined by legal
counsel selected by the Indemnitee and approved by the Company, which approval
shall not be unreasonably withheld. The terms of the Trust shall provide that
(i) the Trust shall not be dissolved or the principal thereof invaded without
the written consent of the Indemnitee; (ii) the trustee of the Trust (the
"Trustee") shall be selected by the Indemnitee; (iii) the Trustee shall make
advances to the Indemnitee for Expenses within ten business days following
receipt of a written request therefor (and the Indemnitee hereby agrees to
reimburse the Trust under the circumstances under which the Indemnitee would be
required to reimburse the Company under Article V hereof; (iv) the Company shall
continue to fund the Trust from time to time in accordance with its funding
obligations hereunder; (v) the Trustee promptly shall pay to the Indemnitee all
amounts as to which indemnification is due under this Agreement; (vi) unless the
Indemnitee agrees otherwise
10
<PAGE> 11
in writing, the Trust for the Indemnitee shall be kept separate from any other
trust established for any other person to whom indemnification might be due by
the Company; and (vii) all unexpended funds in the Trust shall revert to the
Company upon final, nonappealable determination by a court of competent
jurisdiction that the Indemnitee has been indemnified to the full extent
required under this Agreement.
X.
NON-EXCLUSIVITY, SUBROGATION AND MISCELLANEOUS
A. NON-EXCLUSIVITY. The rights of the Indemnitee hereunder shall not be
deemed exclusive of any other rights to which the Indemnitee may at any time be
entitled under any provision of law, the Charter, the Bylaws of the Company, as
the same may be in effect from time to time, any other agreement, a vote of
stockholders of the Company or any general or specific action of the Board of
Directors of the Company or otherwise, and to the extent that during the term of
this Agreement the rights of the then-existing directors and officers of the
Company are more favorable to such directors or officers than the rights
currently provided to the Indemnitee under this Agreement, the Indemnitee shall
be entitled to the full benefits of such more favorable rights. No amendment,
alteration, rescission or replacement of this Agreement or any provision hereof
which would in any way limit the benefits and protections afforded to an
Indemnitee hereby shall be effective as to such Indemnitee with respect to any
action or inaction by such Indemnitee in the Indemnitee's Corporate Status prior
to such amendment, alteration, rescission or replacement.
B. SUBROGATION. In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all documents required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
C. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i) if
delivered by hand, by courier or by telegram and receipted for by the party to
whom said notice or other communication shall have been directed at the time
indicated on such receipt; (ii) if by facsimile at the time shown on the
confirmation of such facsimile transmission; or (iii) if by U.S. certified or
registered mail, with postage prepaid, on the third business day after the date
on which it is so mailed:
If to the Indemnitee, as shown with the Indemnitee's signature below.
If to the Company to:
Crescent Operating, Inc.
306 West 7th Street, Suite 1025
Fort Worth, Texas 76102
Facsimile No. (817) 339-1060
11
<PAGE> 12
or to such other address as may have been furnished to the Indemnitee by the
Company or to the Company by the Indemnitee, as the case may be.
D. GOVERNING LAW. The parties agree that this Agreement shall be governed
by, and construed and enforced in accordance with, the substantive laws of the
State of Delaware, without regard to conflicts of laws principles.
E. BINDING EFFECT. Except as otherwise provided in this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their heirs, executors, administrators, successors, legal representatives
and permitted assigns. The Company shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of their respective assets or businesses, by written
agreement in form and substance reasonably satisfactory to the Indemnitee,
expressly to assume and agree to be bound by and to perform this Agreement in
the same manner and to the same extent as the Company would be required to
perform absent such succession or assignment.
F. WAIVER. No termination, cancellation, modification, amendment,
deletion, addition or other change in this Agreement, or any provision hereof,
or waiver of any right or remedy herein, shall be effective for any purpose
unless specifically set forth in a writing signed by the party or parties to be
bound thereby. The waiver of any right or remedy with respect to any occurrence
on one occasion shall not be deemed a waiver of such right or remedy with
respect to such occurrence on any other occasion.
G. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding among the parties hereto in reference to the subject matter
hereof; provided, however, that the parties acknowledge and agree that the
Charter and Bylaws of the Company contain provisions on the subject matter
hereof and that this Agreement is not intended to, and does not, limit the
rights or obligations of the parties hereto pursuant to such instruments.
H. TITLES. The titles to the articles and sections of this Agreement are
inserted for convenience of reference only and should not be deemed a part
hereof or affect the construction or interpretation of any provisions hereof.
I. INVALIDITY OF PROVISIONS. Every provision of this Agreement is
severable, and the invalidity or unenforceability of any term or provision shall
not affect the validity or enforceability of the remainder of this Agreement. In
addition, it is the intention of the Company and
12
<PAGE> 13
Indemnitee that in the event a provision of this Agreement is not valid or
enforceable as written, there shall be substituted therefor a provision as
nearly like the offensive provision in meaning, intent, operation and effect (so
that the respective rights and duties of the Company and Indemnitee are as
nearly like their respective rights and duties as established under the
offensive provision) as is valid and enforceable.
J. PRONOUNS AND PLURALS. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
K. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together constitute one agreement binding on all the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CRESCENT OPERATING, INC.
a Delaware corporation
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
------------------------------------------,
as INDEMNITEE
Name:
--------------------------------------
Title:
-------------------------------------
Address:
-----------------
-----------------
Facsimile No.:
-----------------
13
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF CRESCENT OPERATING, INC.
Name of Subsidiary State of Incorporation or
Organization
COI Hotel Group, Inc. Texas
WOCOI Investment Company Texas
RoseStar Management LLC Texas
Desert Mountain Development Corporation Delaware
Woodlands Land Company, Inc. Texas
Crescent CS Holdings Corporation Delaware
Crescent CS Holdings II Corporation Delaware
RSCR Arizona Corp. Delaware
RSSW Corp. Delaware
Moody-Day, Inc. Texas
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-09-1997
<PERIOD-END> DEC-31-1997
<CASH> 43,401,132
<SECURITIES> 0
<RECEIVABLES> 25,589,196
<ALLOWANCES> 35,972
<INVENTORY> 10,125,075
<CURRENT-ASSETS> 126,994,258
<PP&E> 94,554,704
<DEPRECIATION> 3,575,671
<TOTAL-ASSETS> 585,977,076
<CURRENT-LIABILITIES> 103,559,646
<BONDS> 215,284,941
0
0
<COMMON> 112,111
<OTHER-SE> (8,172,295)
<TOTAL-LIABILITY-AND-EQUITY> 585,977,076
<SALES> 77,414,357
<TOTAL-REVENUES> 156,882,121
<CGS> 76,877,876
<TOTAL-COSTS> 157,874,747
<OTHER-EXPENSES> 16,422,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,480,743
<INCOME-PRETAX> (21,552,577)
<INCOME-TAX> 612,641
<INCOME-CONTINUING> (22,165,218)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,165,218)
<EPS-PRIMARY> (2.00)
<EPS-DILUTED> (2.00)
</TABLE>
